What Is Return Over Maximum Drawdown (RoMaD)?

Return over maximum drawdown (RoMaD) is a 澳洲幸运5开奖号码历史查询:risk-adjusted return metric used as an alternative to the 澳洲幸运5开奖号码历史查询:Sharpe Ratio or 澳洲幸运5开奖号码历史查询:Sortino Ratio. Return over maximum drawdown is used mai🦹nly ✅when analyzing hedge funds. It can be expressed as:

• RoMaD = 澳洲幸运5开奖号码历史查询:portfolio return ÷ maximum drawdown

Understanding RoMaD

Return over maximum drawdown is a nuanced way of looking at a hedge-fund performance or portfolio performance in general. Drawdown is the difference between a portfolio's point of maximum return (the "high-water" mark) and any subsequent low point of performance. 澳洲幸运5开奖号码历史查询:Maximum drawdown, also called Max DD or MDD, is ꦜthe largest difference between a high point and a low point.

Maximum drawdown is becoming the preferred way of expressing the risk of a hedge-fund portfolio for investors who believe that observed loss patterns over longer periods of time are the best proxy for act෴ual exposure. This is because these same investors♐ believe hedge-fund performance does not follow a normal distribution of returns.

Examples of RoMaD

Return over maximum drawdown is the average return in a given period for a portfolio, expressed as a proportion of the maximum drawdown level. It enables investors to ask the question, "Am I willing to accept an occasional drawdown of X% in order to generate an average return of Y%?"

For example, if the maximum achieved value for a portfolio to date was $1,000 and the subsequꩲent minimum level was $800, the maximum drawdown is 20% [($1000 – $800) ÷ $1000]. That is a scary number for investors, particularly if they 🍌were to bail out at the bottom with their investment 20% lighter.

Of course, that is only half the story. Imagine the same portfolio had an annual return of 10%. In that case, you have an investment with a maximum drawdown of 20% and a return of 10% for a RoMAD of 0.5. Now an investor can use that benchmark to compare performance with other portfolios. A RoMaD of 0.5 would be considered the more attractive investment over one with a maximum drawdown of 40% and a return of 10% (RoMaD = 0.25).

On the surface, the returns of these two portf൩olios are the same, but one is much riskier.

RoMaD in Context

In practice, investors want to see maximum drawdowns that are half the annual portfolio return or less. That means if the maximum drawdown is 10% over a given period, investors want a return of 20% (RoMaD = 2). So the larger a fund's drawdowns, the higher the expectation for returns.

As w🧸ith any metric of evaluation, the performance expectations are tempered by the performance of other investments during the same period. So there are times of challenging m🐈arket conditions where a RoMaD of 0.25 is actually stellar, all things considered.