Return Over Maximum Drawdown (RoMaD)
What Is Return Over Maximum Drawdown (RoMaD)?
Return over maximum drawdown (RoMaD) is a risk-adjusted return metric utilized as an alternative to the Sharpe Ratio or Sortino Ratio. Return over maximum drawdown is utilized for the most part while investigating hedge funds. It very well may be communicated as:
- RoMaD = portfolio return \u00f7 maximum drawdown
Figuring out RoMaD
Return over maximum drawdown is a nuanced perspective on hedge-store performance or portfolio performance overall. Drawdown is the difference between a portfolio's point of maximum return (the "high-water" mark) and any subsequent low point of performance. Maximum drawdown, likewise called Max DD or MDD, is the biggest difference between a high point and a low point.
Maximum drawdown is turning into the preferred approach to communicating the risk of a hedge-store portfolio for investors who accept that noticed loss designs over longer periods of time are the best proxy for genuine exposure. This is on the grounds that these equivalent investors accept hedge-reserve performance doesn't follow a normal distribution of returns.
Instances of RoMaD
Return over maximum drawdown is the average return in a given period for a portfolio, communicated as an extent of the maximum drawdown level. It empowers investors to ask the inquiry, "Am I able to acknowledge a periodic drawdown of X% to produce an average return of Y%?"
For instance, on the off chance that the maximum accomplished value for a portfolio to date was $1,000 and the subsequent least level was $800, the maximum drawdown is 20% [($1000 - $800) \u00f7 $1000]. That is a startling number for investors, especially if they somehow happened to bail out at the base with their investment 20% lighter.
Of course, that is just half the story. Envision a similar 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. Presently an investor can utilize that benchmark to compare performance with different portfolios. A RoMaD of 0.5 would be viewed as the more alluring investment north of one with a maximum drawdown of 40% and a return of 10% (RoMaD = 0.25).
On the surface, the returns of these two portfolios are something similar, yet one is a lot riskier.
RoMaD in Context
In practice, investors need 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 need a return of 20% (RoMaD = 2). So the bigger an asset's drawdowns, the higher the expectation for returns.
Similarly as with any measurement of evaluation, the performance expectations are tempered by the performance of different investments during a similar period. So there are times of testing market conditions where a RoMaD of 0.25 is really stellar, in light of everything.
