Folio Lab/Documentation

Return over Maximum Drawdown (RoMaD)

RoMaD divides the compound annual growth rate of a run by the absolute maximum drawdown of the same run, over the full sample. It answers one question: how much annual growth did the portfolio deliver for each unit of its worst peak-to-trough loss?

RoMaD and the Calmar Ratio

FolioLab returns romad and calmar_ratio as separate fields. RoMaD divides the CAGR of the whole run by the absolute maximum drawdown of the whole run. The Calmar Ratio divides the CAGR of the last 36 months by the absolute maximum drawdown inside those 36 months, and it is null on a run shorter than 36 months.

The two names come from two traditions. Return over maximum drawdown since inception is normally called the MAR ratio, or RoMaD. Young (1991) defined the Calmar Ratio on a trailing 36-month window. Many libraries dropped that window, which left the two formulas identical. FolioLab keeps Young's window, so the two fields differ.

Read the pair together. A RoMaD well below the Calmar Ratio means the worst drawdown of the run is older than 36 months. Two close values mean the last 36 months hold a drawdown as deep as any in the run. The Calmar Ratio page covers the 36-month window.

Overview

RoMaD belongs to the drawdown family of risk-adjusted measures. Where the Sharpe Ratio divides excess return by the standard deviation of returns, RoMaD divides growth by the single worst decline the portfolio actually suffered. The choice of denominator carries the whole difference. Standard deviation treats an upside surprise and a downside surprise alike, and it does not care about the order of the returns. A maximum drawdown cares about nothing else.

That makes RoMaD closer to the experience of holding the portfolio. An investor who watched the value fall 40% from its peak remembers the 40%, not the annualized dispersion of the daily returns. RoMaD prices the growth against that number.

The measure is common in managed futures and hedge fund reporting, where a capital-preservation mandate makes the worst decline the binding constraint. It is also the natural yardstick where a drawdown triggers a redemption, a margin call, or a de-risking rule, because those events key off the drawdown and not off the variance.

Mathematical Formulation

Core Formula

RoMaD is the ratio of the compound annual growth rate to the absolute value of the maximum drawdown:

Both terms are read over the full sample of the run. The denominator is taken as an absolute value, so a higher RoMaD indicates better growth per unit of worst-case decline.

Compound Annual Growth Rate

FolioLab builds the compound curve from the daily portfolio returns and annualizes its final value over the number of observations:

where is the number of daily observations in the run and is the run's own trading days a year: about 246 on an Indian run, which makes this growth over calendar time, and 252 on a US run. The calculation returns zero when the run holds fewer than two observations, or when the final compound value is not positive.

Maximum Drawdown

The maximum drawdown is the deepest point of the drawdown series, measured against the running peak of the same compound curve:

This quantity is at or below zero, so RoMaD divides by its absolute value. FolioLab returns zero for the ratio when the absolute maximum drawdown is below , which guards the case of a curve that never fell.

Reading the number

A RoMaD of 0.5 means the portfolio grew at half the rate of its worst decline: 12% a year against a 24% drawdown. A RoMaD above 1.0 means the annual growth rate exceeded the worst decline. Practitioners often treat 0.5 as acceptable and 1.0 as strong, but those are conventions of the managed futures industry and not thresholds this platform validates.

A negative RoMaD means the CAGR was negative. The ratio is then difficult to rank, because a deeper drawdown moves a negative numerator toward zero and makes the result look better. Compare negative values against the raw CAGR instead.

Advantages & Limitations

Advantages

  • Matches the lived experience: The denominator is the loss the investor actually saw, not a dispersion statistic.
  • Non-parametric: Makes no distributional assumption. It works on any return series, including a strongly skewed one.
  • Capital preservation focus: Aligns with a mandate where the worst decline is the binding constraint.
  • Simple to audit: Two inputs, both visible on the results page, and one division.

Limitations

  • Grows with the run: The maximum drawdown of a long run had more time to deepen, so compare RoMaD values only over the same period. The Calmar Ratio fixes the window at 36 months for that reason.
  • Single-event dependency: One episode sets the denominator. A portfolio with one bad week and an otherwise calm decade is scored on that week.
  • Upward bias in the denominator: Maximum drawdown grows with the length of the sample, so a long run scores lower than a short run for the same behaviour. Compare runs over the same period only.
  • Recovery neglected: A drawdown that recovered in a month and one that took four years score identically.
  • Backward looking: Both terms describe the observed sample. Neither is a forecast, and the worst future decline can exceed the worst observed one.

References

  1. Young, T. W. (1991). "Calmar Ratio: A Smoother Tool." Futures, 20(1), 40.
  2. Magdon-Ismail, M., & Atiya, A. F. (2004). "Maximum Drawdown." Risk, 17(10), 99-102.
  3. Bacon, C. R. (2013). Practical Risk-Adjusted Performance Measurement. John Wiley & Sons.
  4. Chekhlov, A., Uryasev, S., & Zabarankin, M. (2005). "Drawdown Measure in Portfolio Optimization." International Journal of Theoretical and Applied Finance, 8(1), 13-58.

Not investment advice. Past performance is not indicative of future results.