What is Max Drawdown & Calmar Ratio?

Sean P. Gilligan
Author
April 12, 2023
15 min
What is Max Drawdown & Calmar Ratio?

What is Max Drawdown?

Max drawdown is a metric used to measure the largest peak-to-trough decline in the value of an investment over a specific period. Stated differently, it is the greatest cumulative percentage decline in net asset value due to losses sustained by the strategy. It is expressed as a percentage of the peak value and represents the maximum loss an investor would experience if they invested at the peak and sold at the trough. This ratio is commonly used by investment firms that say their strategy protects on the downside. Max drawdown helps demonstrate how effectively a manager performed when evaluating downside risk.

Max Drawdown Calculation

Example Max Drawdown Calculation

Max drawdown is calculated as a percentage. For example, if you want to know the max drawdown for a strategy since inception, and during that time it reaches a peak of $120, and then declined to a minimum of $90, the max drawdown would be -25.0% = (($90-$120)/$120).

How to Interpret Max Drawdown

Max drawdown is an important metric to consider when evaluating the risk of a strategy, as it provides a clear measure of the potential loss that may occur. It is one of the primary ways investors measure the risk of a strategy, especially when considering risk tolerance.

Max drawdown can be used as a tool for comparing similar strategies. Consider the following hypothetical scenario where the returns are the same, but reviewing max drawdown helps illuminate the risk taken to achieve that return:

Risk-averse investors would prefer Strategy B over Strategy A because it provides the same level of return with lower risk (as measured by max drawdown). Strategy B also performed better than the benchmark in this scenario, indicating that the strategy has performed better at managing downside risk.

Without considering the risk of the strategy, the investor would not have a sense of which investment best suits their risk profile as their decision would be based on returns alone. Considering max drawdown allows the investor to make a more informed decision while considering downside risk. Going one step further and using the max drawdown to calculate the Calmar ratio can be even more helpful as this ratio combines both return and risk into one metric.

What is the Calmar Ratio?

The Calmar ratio utilizes max drawdown to create a ratio of return to risk that helps investors compare strategies based on the level of return achieved after adjusting for the risk taken. This ratio adjusts the annualized strategy return by the maximum drawdown of the strategy. A higher Calmar ratio is preferred as that would represent better strategy-level performance on a risk-adjusted basis. Calmar is also used by firms interested in demonstrating how they performed in managing downside risk.

Calmar Ratio Calculation

Notice that a negative sign is placed in front of the maximum drawdown in the denominator. The negative sign will allow for the Calmar ratio to be calculated as a positive number since max drawdown statistics are negative by nature. The positive statistics make for an easier interpretation and comparison when reviewing different strategies side by side.

Example Calmar Ratio Calculation

Unlike max drawdown, the Calmar ratio is calculated as a decimal. While some may believe a Calmar ratio above a specific threshold is “good,” the ratio is best interpreted when comparing multiple strategies, or a strategy against a benchmark. For example, a strategy with an annualized return of 9.0% and a -25.0% max drawdown, results in a Calmar ratio of 0.36 = (9.0%/25.0%). Without another strategy or benchmark to compare, it’s hard to know if this result is good or bad. Thus, it’s best to use it as a comparison tool.

How to Interpret the Calmar Ratio

The Calmar ratio can be helpful when comparing strategies by creating statistics that are easily comparable across investment options. This statistic can also be used for various performance periods, which allows investors to make a fair comparison across investment strategies with different inception dates. Using the Calmar ratio helps investors compare results between strategies that may have different annualized returns and different max drawdowns. Let’s build off the prior example with some slight changes to show how the Calmar ratio can help in a less straight forward example where both the returns and max drawdown are different between the options:

If the above scenario was presented to an investor, it may be difficult to pick between Strategy A and Strategy B. Strategy A has the higher return but is riskier based on the max drawdown. Strategy B has the lower return but is less risky based on the max drawdown. For a risk-averse investor, this could be a difficult choice to make without any other information available.

Once the Calmar ratio is introduced, it provides a clearer picture of which option has the best risk-adjusted performance. Although an investor may be tempted with the higher returns of Strategy A, a risk-averse investor would still select strategy B due to the higher risk-adjusted performance demonstrated with the Calmar ratio. And although the strategy return did not beat the benchmark, on a risk-adjusted basis (as represented by Calmar) Strategy B is preferred.

Conclusion

Like many risk-adjusted statistics, the max drawdown and Calmar ratio are very helpful in reviewing strategy performance. These statistics can be helpful in isolation but are most useful in comparing strategies or comparing against a benchmark. Each statistic tells a different piece of the story and can be very powerful when combined with other risk statistics to provide investors with a better understanding of the return vs risk profile of the strategy or investment.

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ColoradoBiz Names Longs Peak’s Jocelyn Gilligan, CFA, CIPM as a GenZYZ Top Young Professional
Longs Peak is pleased to announce that Partner and Co-Founder, Jocelyn Gilligan has been named a GenXYZ Top Young Professional by ColoradoBiz Magazine. As ColoradoBiz states, “They’re uncommon achievers, whether as entrepreneurs, CEOs, nonprofit leaders, visionaries critical to their companies’ success or, in some cases, all of those roles. This year’s Top 25 Young Professionals figure to continue making a difference professionally and in their communities for years to come.”
March 14, 2023
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Longs Peak is pleased to announce that Partner and Co-Founder, Jocelyn Gilligan has been named a GenXYZ Top Young Professional by ColoradoBiz Magazine.

As ColoradoBiz states, “They’re uncommon achievers, whether as entrepreneurs, CEOs, nonprofit leaders, visionaries critical to their companies’ success or, in some cases, all of those roles. This year’s Top 25 Young Professionals figure to continue making a difference professionally and in their communities for years to come.”

Jocelyn grew up in Boulder, CO and graduated from the University of Colorado. She started her career at Ernst & Young in New York City where she worked on their Financial Services Transfer Pricing Team. She transferred with EY to their office in Shanghai and then eventually to Hong Kong. Jocelyn left EY as a Manager and relocated back to Colorado where she and her husband started a family. Soon thereafter, Jocelyn and Sean founded Longs Peak out of a small one-car garage in their home in Longmont, CO. Now running a thriving team of 14, Jocelyn has weathered the ups and downs of entrepreneurship. She credits a lot of their success to their amazing team and the community of entrepreneurs they live near and network with (Longs Peak is an active member of EO (Entrepreneurs Organization)).

Jocelyn is a voting member of the PTO at her children’s school and a member of Women in Investment Performance Measurement, a group recently founded to support women in the investment performance industry.

Please join us in celebrating this year’s ColoradoBiz Top Young Professionals nominees. You can view the complete list of nominees here

About ColoradoBiz’s Top 25 Young Professionals

The 13th annual Gen XYZ awards is open to those under 40 who live and work in Colorado — numbered in the hundreds, making for difficult decisions and conversations among judges, as always. Applications were judged by our editorial board based on career achievement, community engagement and their stories of how they got to where they are now.

About Longs Peak

Longs Peak is a purpose and values-driven company. It is our mission to make investment performance information more transparent and reliable—empowering investors to make better, more informed investment decisions.

At the onset, we were looking to help smaller investment managers by giving them access to professional performance experts and tools typically only available to very large firms. We know that our work enables emerging managers to compete with the big guys and helps facilitate their growth. We strive to be our clients’ most valued outsource partner and to be known for our exceptional client service. We know that providing exceptional client service means that we must first create a culture that lives by the ideals we are trying to create for our clients. A place where incredibly talented individuals are empowered to put their best work into the hands of clients that truly value what we do. As a firm, we recognize that our greatest asset is people – both those we work with and those we work for. We continue to evolve into something that represents the needs of both of these groups and hope someday a GIPS Report is provided to every prospective investor in the world.

SEC Clarifies Marketing Rule: Gross-of-Fee Returns Allowed Under Certain Conditions
The investment management industry has spent significant time grappling with the SEC’s Marketing Rule and the question of whether gross-of-fee returns can be presented without corresponding net-of-fee returns in certain cases. Many firms have invested resources in trying to allocate fees to individual securities and sectors in an effort to comply. However, the SEC has now issued two FAQs (March 19, 2025) that provide much appreciated clarity on extracted performance and portfolio characteristics. The key takeaway? It is possible to present gross-of-fee returns without net-of-fee returns—if certain conditions are met.
March 27, 2025
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The investment management industry has spent significant time grappling with the SEC’s Marketing Rule and the question of whether gross-of-fee returns can be presented without corresponding net-of-fee returns in certain cases. Many firms have invested resources in trying to allocate fees to individual securities and sectors in an effort to comply. However, the SEC has now issued two FAQs (March 19, 2025) that provide much appreciated clarity on extracted performance and portfolio characteristics. The key takeaway? It is possible to present gross-of-fee returns without net-of-fee returns—if certain conditions are met.

Extracted Performance: Gross Returns Can Stand Alone Under Specific Criteria

Investment advisers often present the performance of a single investment or a subset of a portfolio (“extracted performance”) in marketing materials. Historically, the SEC required both gross and net performance to be shown for such extracts. The new guidance provides a pathway for firms to display only gross-of-fee extracted performance, provided the following conditions are met:

  1. The extracted performance must be clearly identified as gross performance.
  2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
  3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the extracted performance.
  4. The total portfolio’s performance must be calculated over a period that includes the entire period of the extracted performance.

If these conditions are satisfied, the SEC staff has indicated they will not recommend enforcement action, even if the extracted performance is presented without corresponding net returns. This is a notable shift, as it allows firms to avoid the complex and often impractical task of allocating fees at the investment or sector level.

Portfolio and Investment Characteristics: Net-of-Fee Not Always Required

Another common industry question has been whether certain portfolio or investment characteristics—such as yield, volatility, Sharpe ratio, sector returns, or attribution analysis—constitute “performance” under the marketing rule, and if so, whether they must be presented net of fees.

The SEC’s latest guidance acknowledges that calculating these characteristics net of fees can be difficult and, in some cases, may lead to misleading results. As a result, the staff has confirmed that firms may present gross characteristics alone, without net characteristics, if they meet the following criteria:

  1. The characteristic must be clearly identified as calculated without the deduction of fees and expenses.
  2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
  3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the gross characteristic.
  4. The total portfolio’s performance must be calculated over a period that includes the entire period of the characteristic being presented.

As with extracted performance, these conditions help ensure that the presentation is not misleading, reducing the risk of enforcement action.

Bottom Line: A Practical Path Forward

This updated SEC guidance provides much-needed flexibility for investment managers, allowing for the presentation of gross-of-fee returns in a compliant manner. Firms that clearly disclose their approach and follow the specified conditions can reduce compliance burdens while still meeting investor protection standards. While this does not eliminate all complexities of the Marketing Rule, it does offer a practical solution that allows for more straightforward and meaningful performance reporting.

For firms navigating these changes, ensuring clear disclosures and maintaining compliance with the general prohibitions of the rule remains critical. Those who align their advertising materials with these guidelines can now confidently use gross-of-fee performance in a way that is both transparent and in compliance with regulatory requirements.

Questions?

If you have questions about calculating or presenting investment performance in a manner that complies with regulatory requirements or industry best practices, we would love to talk to you. Please feel free to email us at hello@longspeakadvisory.com.

New GIPS Standards Guidance for OCIOs: What You Need to Know
The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.
February 3, 2025
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The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.

What is an OCIO?

An Outsourced Chief Investment Officer (OCIO) is a third-party fiduciary that provides both strategic investment advice and investment management services to institutional investors such as pension funds, endowments, and foundations. Instead of building an in-house investment team, asset owners delegate investment decisions to an OCIO, which handles everything from strategic planning to portfolio management.

Who Does the New Guidance Apply To?

The Guidance Statement for OCIO Portfolios applies when a firm provides both:

  1. Strategic investment advice, including developing or assessing an asset owner’s strategic asset allocation and investment policy statement.
  2. Investment management services, such as portfolio construction, fund and manager selection, and ongoing management.

This ensures that firms managing OCIO Portfolios follow standardized performance reporting, making it easier for prospective clients to compare OCIO providers.

Who is Exempt from the OCIO Guidance?

The guidance does not apply in the following scenarios:

  • Investment management without strategic advice – If a firm only manages investments without advising on asset allocation or investment policy.
  • Strategic advice without investment management – If a firm provides recommendations but does not manage the portfolio.
  • Partial OCIO portfolios – If a firm only manages a portion of a portfolio, rather than the full OCIO mandate.
  • Retail client portfolios – The guidance is specific to institutional OCIO Portfolios and does not apply to retail investors including larger wealth management portfolios.

Key Change: Required OCIO Composites

Previously, OCIO firms had flexibility in defining their performance composites. Now, the GIPS Standards introduce Required OCIO Composites, which categorize portfolios based on strategic asset allocation.

Types of Required OCIO Composites

  1. Liability-Focused Composites – Designed for portfolios aiming to meet specific liability streams, such as corporate pensions.
  2. Total Return Composites – Focused on capital appreciation, commonly used by endowments and foundations.

Firms must classify OCIO Portfolios based on their strategic allocation, not short-term tactical shifts. This standardization enhances comparability across OCIO providers. The specific allocation ranges for the required composites are as follows:

Required OCIO Composites for OCIO Portfolios

Required OCIO Composites
Source: Guidance Statement for OCIO Portfolios

Performance Calculation & Reporting

To ensure transparency, firms must follow specific rules for return calculations and fee disclosures:

  • Time-weighted returns (TWR) are required, even for portfolios with private equity or real estate holdings.
  • Both gross and net-of-fee returns must be presented to clarify the true cost of OCIO management.
  • Fee schedule disclosures must include all investment management fees, including fees from proprietary funds and third-party placements.

Enhanced Transparency in GIPS Reports

The new guidance also requires OCIO firms to disclose additional portfolio details, such as:

  • Annual asset allocation breakdowns (e.g., growth vs. liability-hedging assets).
  • Private market investment and hedge fund exposures.
  • Portfolio characteristics, such as funding ratios and duration for liability-focused portfolios.

By providing these details, OCIO firms enable prospective clients to make better-informed decisions when selecting an investment partner.

When Do These Changes Take Effect?

The Guidance Statement for OCIO Portfolios is effective December 31, 2025. From this date forward, GIPS Reports for Required OCIO Composites must follow the new standards. However, firms are encouraged to adopt the guidance earlier to improve transparency and reporting consistency.

Why This Matters

With OCIO services growing in popularity, this new guidance ensures that firms adhere to best practices in performance reporting. By establishing clear rules for composite classification, return calculation, and fee disclosure, the guidance empowers asset owners to compare OCIO providers with confidence.

As the December 31, 2025 deadline approaches, OCIO firms should begin aligning their reporting practices with this new guidance to stay ahead of the curve.

Don’t miss CFA Institute’s webinar scheduled for this Thursday February 6, 2025 to hear more on this guidance statement.

Questions?

If you have questions about the Guidance Statement for OCIO Portfolios or the Standards in general, we would love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with the GIPS Standards on an ongoing basis. Please feel free to email us at hello@longspeakadvisory.com.