One of the most unimportant statistics of any manager or trading system is its returns. Returns alone tell investors nothing about the risk needed to reach those returns. As an example, how will we know if a 100% return is good? The answer should be it is dependent on the risk needed to get it. Who cares if 1 or 2 people made 100 percent return if an even greater share of the investors lost all their money first!
What does matter is RISK adjusted RETURNS. After we know how large of a risk a system or manager took to reach a return it is then we can correctly appraise the returns.
So how can we measure risk adjusted performance? One of my favorite ways is using the MAR Ratio. This is short for the Managed Account Reports Ratio. What MAR measures is the average annual percentage return divided by the largest percentage drawdown. It’s a necessity investors use percentages and not raw profit or loss dollar amounts in order for the ratio to be correct.
If, for example, a manager or trading method had an average annual return of 30% and at one time had a maximum drawdown of 15% then his MAR Ratio would be two. In others words, 30 divided by 15 = 2.
What’s a superb MAR Ratio? To determine this, I suspect one of the finest places to look is at the sector of professionally managed money. These managers are sometimes the very best of the best when it comes to traders. In a few cases, they have track records 20 and 30 years old and have hundreds of millions or many billions of dollars under management. When we look at the best of those managers, they are fortunate if they may be able to maintain a MAR Ratio of one! Meaning, if they have made a median of 30% a year, then they also likely had an onetime largest drawdown of 30%.
I hope this sets off 1 or 2 alarms in your head. Traders should wonder how it is they see products offering off the chart performance, when the best of the best cannot do it! They may have had a lucky period, but 99.9 % of the time they took more risk than a trader would doubtless ever want to take.
This draft is about realism, and what I believe is really possible with top caliber trading systems and money managers. Remember, I have developed trading systems for more than eighteen years and have won many awards for them. Besides this, I have gone on to be a successful hedge fund manager attracting tens of millions of dollars in investing funds.
So what do I think is possible? The answer’s a MAR Ratio of 1.5 – 2.00. In other words, an average yearly percentage return about 1.5 to 2 times higher than the maximum percentage drawdown.
One of the best risk adjusted returns I have is my Relativity Trading System. I have geared the leverage to the point that historically it shows about a 35% yearly return and about a 17% maximum drawdown. So the ratio is almost 2 to 1. Keep in mind, the leverage can easily be doubled with the same account size and now it will shows returns of about 70%; nonetheless the drawdown will go up to about 34%. In other words, it’ll maintain that approximately 2 to 1 ratio.
Dean Hoffman
DH Trading Systems
CFTC REQUIRED RISK DISCLOSURE
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
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Mer 16 Fév - 10:23