As members of the National Futures Association, or NFA, everything we publish is reviewed to ensure compliance with regulation. The goal is to make sure the information we present to the public is fair, accurate and well defined.

Along the lines of being well defined, the different performance and risk statistics used throughout our website, newsletters, and on this blog at times can admittedly be an alphabet soup of different acronyms and funny sounding words (Sortino?).

So how exactly are all of these metrics defined? We’re glad you asked:

Compound ROR

The annual rate of return which, if compounded over the number of years in the period analyzed, would yield the cumulative gain or loss achieved during that period.  It is essentially the average annual rate of return (on a compounded basis).

Max Drawdown (Max DD)

A drawdown is the worst “pain” experienced by an investor in a specific investment, and it is one of the most valuable measures of risk for a trading system or CTA in our opinion. As an example, an investor starting out with a $100,000 account, who sees it fall down to $80,000 before it runs back up to $110,000 saw a $20,000 loss ($100K – $80K), which would equal a 20% ($20K/$100K) drawdown.

Max Run-Up

The inverse of a max drawdown, a max run-up is the largest percent return between any two points in the history of a program.

Average Month

Simply the average of all the months in the program’s history, to give the average monthly return for a program.

% Months Profitable

Has the program made money in 2 out of every 3 months (66%), 2 out of 5 (40%), and so on.. This tells you what percent of months in the track record saw a profitable return.

Sharpe Ratio

Developed by Stanford professor Dr. William Forsyth Sharpe in 1966, this is a risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sharpe ratio measures return per unit of risk, with risk defined as the standard deviation of returns. The formula is: Sharpe = (Compound ROR – risk free ROR) / (Standard Deviation of Returns). Attain uses a risk free ROR of 2% in calculating the Sharpe ratio in order to provide a consistent basis for evaluation throughout our research pieces.

Sortino Ratio

The Sortino Ratio was developed by Director of the Pension Research Institute Dr. Frank A. Sortino in 1980, and is a risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sortino ratio measures return per unit of risk, with risk defined as the standard deviation of negative returns. It is a modification of the Sharpe ratio but treats risk only as the downside volatility, while the Sharpe ratio penalizes both upside and downside volatility equally. The formula is: Sortino = (Compound ROR – risk free ROR) / (Standard Deviation of Negative Returns).

Sterling Ratio

Developed by Deane Sterling Jones, the Sterling Ratio is a risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sterling ratio measures return per unit of risk, with risk defined as the average annual drawdown. Theoretically, a higher Sterling ratio is better because it means that the investment is receiving a higher return relative to risk. The formula is: Sterling = (Compound ROR) / (Avg. Ann DD – 10%).

MAR Ratio

Developed in the early 1990’s by Managed Accounts Reports, Inc. (hence, the name), the MAR ratio is a risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The MAR ratio measures return per unit of risk, with risk defined as the maximum drawdown. The formula is: MAR = (Compound ROR) / (Max DD).

Don’t confuse it with the CALMAR ratio. Though some assume the MAR ratio refers to a shortening of the CALMAR name, there is a key difference. The MAR ratio analyzes data from the inception of the program, whereas the CALMAR ratio only analyzes 36 months of data. We choose to use the MAR ratio because it paints a much broader picture of the program and includes all draw downs. If a program has not had a drawdown in the past 36 months, this will skew the readings of a CALMAR ratio. Think of the Chicago Bulls basketball team in the 36 months before Michael Jordan retired, and the 36 months after, and you can see why limiting your view to just 36 months may not be a great idea.

Average Winning Month

Simply the average of all the winning months in the program’s history, to give the average monthly gain for a prorgam. This gives investors a benchmark on which to measure future monthly gains for a program.

Average Losing Month

Simply the average of all the losing months in the program’s history, to give the average monthly loss for a prorgam. This gives investors a benchmark on which to measure future monthly losses for a program.

—-

Why use all of this data? Unfortunately, there is no magic equation out there that will give you a complete idea of a programs potential returns, risk and past performance, although our flag ranking on our website attempts to do just that by ranking programs across over 25 different metrics. In truth some investors care much more about a certain metric than others do. As such, we take care to provide as much data as possible to anyone who may want to investigate a given CTA or trading system. To see how we use these metrics in our analysis, check out our recent Semi-Annual Top 15 Managed Futures Programs newsletter.

Is there another piece of data you’d like to see in our analysis? Comment here- we’d love to get your input!