Growing your investments is important — but protecting them from deep losses is just as vital.
It's not just how much you earn that matters, but how painful the journey can be along the way.
The Calmar ratio helps you judge how efficiently an investment delivers returns relative to its worst historical losses.
Instead of focusing on day-to-day fluctuations, it zeroes in on the maximum drawdown, a key measure of downside risk.
A Calmar ratio of 1.0 means your average annual return matches your worst drawdown — a neutral balance between gain and pain.
Higher values suggest your portfolio is delivering strong returns with relatively limited downside.
Lower values signal that even decent returns may have come at the cost of major losses.
Because it captures the impact of severe declines, the Calmar ratio is especially useful in strategies where preserving capital is critical — such as hedge funds, tactical models, or retirement income portfolios.
Compares return to maximum historical loss — not average fluctuations.
Helps identify strategies that deliver returns without exposure to sharp declines.
•
Reflects investor pain:
Aligns with how people experience risk — through losses, not volatility alone.
Based on just one drawdown — may not reflect recovery speed or multiple losses.
The result can vary depending on the period chosen — be consistent.
Relies on past data — doesn't guarantee future downside will be similar.
1. What is the Calmar ratio?
The Calmar ratio is a risk-adjusted performance metric
A way of assessing investment returns while accounting for the level of risk taken.
that compares an investment's average annual return to its largest historical drawdown.
In simple terms, it tells you how much return you're earning for the worst loss you've endured.
Unlike the
Sharpe or
Sortino ratios, which rely on volatility or downside deviation,
the Calmar ratio focuses on the
maximum drawdown
The largest observed peak-to-trough drop in portfolio value during a given time period.
— a key measure of capital risk.
Originally developed for evaluating managed futures and hedge funds, the Calmar ratio is especially valuable for strategies where avoiding deep losses is critical.
It's named after the California Managed Accounts Report, the newsletter that introduced and popularised it in the 1980s.
Here's a quick glossary of the terms used in the Calmar ratio.
| Term |
What it means |
| Average annual return |
Use the geometric mean of yearly returns to capture the compound rate of return. Arithmetic averages can overstate performance when volatility is present.
|
| Drawdown |
A decline in portfolio value from a recent high, due to market movements — not from withdrawals.
It measures how far an investment has fallen before recovering, and is often used to assess downside risk.
|
| Maximum drawdown |
The deepest drawdown recorded during a given period — from the highest point to the lowest before a new peak is reached. It reflects the worst loss an investor would have experienced.
|
| Calmar ratio |
Return divided by drawdown — a measure of reward per unit of worst-case risk. |
2. The Calmar ratio formula
The Calmar ratio compares an investment's
average annual return
Typically the geometric average return over the period being assessed.
to its
maximum drawdown
The largest percentage drop from a portfolio's peak to its lowest point before a recovery.
.
It shows how efficiently your returns are being generated relative to the worst losses endured.
Formula:
Where:
Average annual return = Geometric mean return over the analysis period
Maximum drawdown = Largest peak-to-trough percentage decline over the same period
A higher drawdown means more capital was lost at some point, which lowers the ratio.
A low Calmar ratio can indicate that the investment experienced deep losses relative to its returns — a red flag for capital preservation.
The Calmar ratio is typically calculated using annual returns and a 3-year or 5-year trailing maximum drawdown.
If you're using monthly or quarterly data, make sure both return and drawdown periods are aligned.
Unlike absolute losses (e.g. £10,000 down), maximum drawdown is expressed as a percentage of the investment's peak value.
This standardisation makes it easier to compare across funds, strategies, and asset classes.
3. Interpreting the results
The Calmar ratio tells you how much return you're earning for every unit of worst-case downside risk.
A higher ratio means you're getting strong returns without suffering large peak-to-trough losses — a sign of disciplined, resilient performance.
A Calmar ratio above 1.0 is typically seen as good.
It means the investment is generating more annual return than it has lost in any single drawdown period.
Below 1.0, and particularly under 0.5, the returns may not justify the depth of the losses experienced.
Here's a common interpretation framework for the Calmar ratio.
While not a formal standard, these ranges offer a helpful way to gauge whether an investment’s returns are truly worth the risk of severe losses.
Higher scores suggest smoother growth and better capital protection — especially valuable in volatile markets or for investors with a low drawdown tolerance.
| Calmar ratio |
Interpretation |
Rating |
| > 3.0 |
Exceptional — high return with very limited drawdowns |
+++ |
| 1.0 - 3.0 |
Strong — good balance between return and risk |
++ |
| 0.5 - 1.0 |
Moderate — drawdowns may be too large for the return |
+ |
| < 0.5 |
Weak — returns don't compensate for risk of large losses |
- |
Consider the following when interpreting a Calmar ratio.
Like any metric, it works best when used thoughtfully — within the right context and alongside complementary indicators.
A high score isn’t always predictive of future safety, and a low one doesn’t automatically mean poor management.
-
Time horizon matters: - A fund may have a high ratio in a calm market, but fall sharply after a new drawdown.
-
Drawdown sensitivity: - A single extreme loss can dominate the metric — even if the average performance is steady.
-
Compare like-for-like: - Use Calmar ratios within similar strategy types or time frames. It's less useful for cross-category comparisons.
4. Calmar in action: worked example
Let's compare three portfolios that each average a 10% annual return over five years.
At first glance, they seem equally effective — but the journey behind those returns differs dramatically.
The Calmar ratio helps uncover which portfolio delivered its returns most efficiently relative to its
maximum drawdownThe largest percentage drop from a portfolio's peak value to its subsequent lowest point before a new high is reached..
These three hypothetical portfolios all end up in the same place — but take very different paths to get there.
The table shows how their risk-adjusted profiles diverge, despite identical average returns.
| Portfolio |
Average return |
Max drawdown |
Calmar ratio |
| A | 10% | 4.76% | 2.10 |
| B | 10% | 10.00% | 1.00 |
| C | 10% | 20.00% | 0.50 |
At a glance, the Calmar ratios reveal how efficiently each portfolio delivered its return.
Here's how to interpret them:
-
Portfolio A: – Took a dip early, from £105 to £100 in Year 2 — but recovered strongly.
With just a 4.76% drawdown and a Calmar ratio of 2.10, it delivers twice the return per unit of downside risk.
-
Portfolio B: – Experienced a sharp 10% fall in Year 2 before rebounding.
While the final return is the same, its Calmar ratio of 1.0 signals a direct trade-off — one unit of gain for every unit of pain.
-
Portfolio C: – Tells a cautionary tale. Despite finishing strong, it plunged 20% early on.
Many investors would have bailed during the drop. A Calmar ratio of 0.5 reflects poor efficiency: double the risk for the same reward.
This is where the Calmar ratio proves its worth. It doesn't just reward performance — it rewards resilience.
Now let's look at the same three portfolios — but through a different lens.
This section tracks each portfolio year by year — not just how they performed, but how deep the drawdowns were and how long they took to recover.
These details shape the investor’s lived experience of risk, beyond averages and ratios.
| End of Year |
Portfolio A |
Portfolio B |
Portfolio C |
| 0 | £100.00 | £100.00 | £100.00 |
| 1 | £105.00 | £110.00 | £120.00 |
| 2 | £100.00 ↓ | £99.00 ↓ | £96.00 ↓↓ |
| 3 | £115.76 | £108.90 | £105.60 |
| 4 | £121.55 | £119.79 | £116.16 |
| 5 | £127.63 | £131.77 | £127.78 |
| Peak before drawdown | £105.00 | £110.00 | £120.00 |
| Trough before recovery | £100.00 | £99.00 | £96.00 |
| Max drawdown | –4.76% | –10.00% | –20.00% |
The timeline below walks through what happened each year — highlighting the emotional highs and lows behind the numbers.
-
Starting point: – Each portfolio begins with a £100 investment. They all finish around £128–£132 — but the ride in between varies dramatically.
-
Year 1: – All three portfolios rise. A climbs to £105, B to £110, and C surges to £120. C looks like the early winner.
-
Year 2: – Setback strikes. A falls to £100, B to £99, and C crashes to £96. These are the lowest points before recovery.
-
Years 3–5: – All portfolios recover. By Year 5, they're neck and neck — but the emotional impact of early losses lingers.
-
Max drawdown: – The final row highlights the steepest fall each portfolio faced.
These numbers power the Calmar ratioCalculated as average annual return ÷ maximum drawdown. It penalises strategies that suffer deep falls., helping investors compare return versus worst-case risk.
*Max drawdown annotated in Year 2 for all three portfolios — highlighting the moment of deepest investor stress.
Maximum drawdown shows how deep a loss went — but not how long it took to recover.
Two portfolios might have the same drawdown but very different recovery paths — a subtlety the Calmar ratio doesn't capture.
This table compares the drawdown and recovery time for each portfolio:
| Portfolio |
Max drawdown |
Recovery time |
| A | –4.76% | 1 year |
| B | –10.00% | 2 years |
| C | –20.00% | 4 years |
Recovery speed can have a huge behavioural impact — long slogs back to breakeven may lead investors to abandon the strategy altogether.
That's why some analysts use additional metrics like the
Ulcer Index to capture both depth
and duration.
-
Portfolio A: - Smooth and steady, no sharp drops, consistent compounding, and a swift recovery from a shallow dip. Ideal for risk-averse investors seeking confidence in long-term growth.
-
Portfolio B: - Noticeable turbulence, an early shock tests investor resolve, but a full rebound within two years softens the blow. A balanced ride with moderate risk and reward symmetry.
-
Portfolio C: - A rollercoaster, rapid gains followed by a dramatic plunge. Although it eventually recovers, the 4-year path back demands patience and nerves of steel, with high emotional cost despite decent returns.
The Calmar ratio doesn’t just measure return — it asks what you had to endure to earn it.
In markets where short-term losses can derail long-term plans, Calmar helps investors favour smoother, more resilient journeys over brittle ones with the same destination.
5. Why drawdowns matter
Drawdowns represent the most painful periods for investors — the times when portfolios fall sharply from a peak.
Even if those losses are temporary, they can trigger panic, forced selling, or missed recoveries.
Research shows that investors are more sensitive to losses than to volatility alone
[1]
Studies in behavioural finance show drawdowns have a stronger psychological impact than general volatility — e.g. Kahneman & Tversky (1979), Prospect Theory.
, which is why metrics like the Calmar ratio often align better with real-world risk tolerance.
The Calmar ratio puts these worst-case moments front and centre. It doesn't care how smooth your average return is — if you've experienced a deep drop, it'll show.
-
They're hard to recover from: - A 50% drawdown requires a 100% gain to break even — which can take years.
-
They break investor discipline: - Large losses often lead to emotional decisions like selling at the bottom.
-
They affect financial goals: - Retirees or income seekers may be forced to withdraw during downturns, locking in losses.
-
They distort long-term returns: - A strong average return can be misleading if it's punctuated by large setbacks.
That's why maximum drawdown — and metrics like Calmar that account for it — offer a more behaviourally grounded view of risk. They reflect not just how much you might gain, but how deep the lows could go.
6. When is the Calmar ratio useful?
The Calmar ratio is most useful when you want to assess how well an investment protects capital during downturns — not just how much it earns on average.
It's especially valuable when the size and timing of drawdowns matter as much as the returns themselves.
Unlike metrics that smooth over risk or reward short-term volatility, Calmar zeroes in on worst-case performance — making it highly relevant in fragile markets or goal-based strategies.
The Calmar ratio shines in scenarios where protecting capital matters as much as — or more than — chasing performance:
-
Hedge funds and alternatives: - In strategies built on leverage or tight risk controls, avoiding large drawdowns is often a bigger priority than delivering blockbuster gains.
-
Trend-following or tactical funds: - A single deep loss can undo months or years of gains. Calmar helps assess whether strategies are prone to whiplash under stress.
-
Retirement drawdown strategies: - Deep losses during decumulation can trigger sequence risk, where early portfolio dips permanently reduce your income stream.
-
Comparing high-volatility assets: - Calmar reveals whether headline returns came at an emotional price — ideal when weighing crypto, commodities, or early-stage tech.
The Calmar ratio is powerful — but not perfect. Use it with a clear view of its limitations:
-
One-off events dominate: - A single crash can skew the result for years, especially in shorter time frames or concentrated portfolios.
-
Ignores recovery speed: - Two portfolios may fall the same amount but one rebounds in months, the other in years — Calmar doesn’t tell you which.
-
Backwards-focused: - It tells you what’s survived in the past — not how a portfolio might behave under future stress.
7. Strengths and limitations
The Calmar ratio shines when you care about one thing above all: how much pain it took to earn a return.
It distils performance into a clear, intuitive trade-off between annualised gains and the worst loss along the way.
But it's not a full diagnostic — and it's best viewed alongside other measures of risk and return.
The Calmar ratio is most relevant for strategies that focus on absolute returns — those trying to avoid sharp losses entirely, not just beat the market.
But for a broader risk picture, you might also consider tools like:
Sortino (targets downside deviations),
Sharpe (based on overall volatility), or
Ulcer Index (penalises depth and duration of drawdowns).
Strengths
- ✓ Directly captures investor pain by using maximum drawdown — a real-world, felt experience.
- ✓ Favours smoother ride profiles over sharp-risk high-return plays — good for capital preservation goals.
- ✓ Penalises strategies that chase returns at the cost of deep losses — reflects asymmetric risk aversion.
- ✓ Simple to interpret: a Calmar of 2 means the return is twice as large as the worst historical loss.
- ✓ Particularly suited to hedge funds, tactical portfolios, or funds marketed as “low risk” or “steady return”.
Limitations
- ✗ Sensitive to the measurement period — changing the timeframe can change the drawdown figure dramatically.
- ✗ Only considers the single worst fall — ignores the frequency or duration of smaller declines.
- ✗ Backward-looking — doesn't predict future drawdowns or account for new market conditions.
- ✗ Doesn't differentiate between fast recoveries and long slogs — time to recovery is ignored.
- ✗ Can be skewed by one-off anomalies — a single freak loss may permanently distort the ratio.
8. Alternatives to the Calmar ratio
While the Calmar ratio helps assess returns in light of worst-case losses, it's only one way to look at risk. Different situations — such as benchmarking, evaluating active management, or assessing upside potential — may call for different tools.
Here are some commonly used alternatives and complements to the Calmar ratio:
The most widely used risk-adjusted return measure. Penalises all volatility — both upside and downside.
- What it measures: Return per unit of total volatility
- Best for: Broad comparisons across diverse asset classes
- Key limitation: Doesn't distinguish between harmful and beneficial volatility
Focuses only on downside deviation, making it more forgiving of upward volatility.
- What it measures: Return per unit of downside volatility
- Best for: Comparing strategies with asymmetric risk profiles
- Key limitation: Sensitive to how downside is defined and measured
Evaluates the consistency of active returns above a benchmark, adjusted for tracking error.
- What it measures: Excess return over benchmark per unit of deviation
- Best for: Assessing active managers relative to passive benchmarks
- Key limitation: Not applicable without a relevant benchmark
Considers the entire return distribution — comparing the probability-weighted gains and losses relative to a threshold.
- What it measures: Ratio of gains to losses above a minimum acceptable return
- Best for: Analysing skewed or fat-tailed distributions
- Key limitation: Requires more granular return data and can be harder to interpret
9. Interactive calculator
Use this tool to calculate the Calmar ratio of your investment portfolio and understand how efficiently it's delivering returns relative to worst-case losses.
Enter your end-of-period portfolio values and maximum drawdown to calculate the Calmar ratio.
Enter values above to calculate the Calmar ratio.