What is Max Drawdown & Calmar Ratio? 

April 12, 2023

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maximum drawdown

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.


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.