After doing hundreds of OnPointe Risk Analyzer software demos, the number of advisors who knew what the Calmar Ratio was before the demo still sits at ZERO! I find that amazing.
Both metrics measure the “risk-adjusted return” of an investment.
Sharpe Ratio—measures the investment returns vs the volatility
Example: portfolio return = 12%, risk-free rate = 4%, volatility = 15%
Sharpe = (12% − 4%) ÷ 15% = 0.53
The risk-free rate is the 3-month Treasury bill rate.
Calmar Ratio—measures the investment returns vs. the maximum drawdown
Example: Portfolio CAGR = 12%, maximum drawdown = −20%.
Calmar = 12% ÷ 20% = 0.60
What’s the difference? Sharpe uses “volatility,” and Calmar uses “maximum drawdown”
So? Well, there is a big difference. Volatility is not a “risk metric.”
Standard Deviation is a volatility metric that I think is overused in the industry and can give a skewed look at the “risk” of an asset.
Let’s look at an example using the OP Risk On/Risk Off strategy net of fees (which any advisor can use on our “anti-tamp” platform www.advisorstamp.com) vs. SPY.
Interesting stats—the max drawdown is fairly similar, CAGR is much better with OP RORO, Calmar is much better for RORO, volatility is higher with RORO, and in turn, Sharpe is better with SPY. FYI, the volatility that RORO is being punished for is upside volatility.
I don’t like Sharpe Ratio because it doesn’t distinguish between good and bad volatility. And because no client has ever complained about upside volatility, why would I primarily use a “risk” metric that punished upside volatility?
Which metric does a better job of helping you decide if RORO or SPY is better for clients?
If the question is which asset performed better relative to “risk,” the easy answer is OP RORO. If you used Calmar instead of Sharpe, you’d have come to that conclusion. But, 99% of the industry has never heard of Calmar, let alone used it when making decisions.
Guess who else does NOT use Calmar Ratio? Riskalyze/Nitrogen, Hidden Levers, and just about every other “risk tolerance” program in the industry. If you are using these programs…why?
When is Calmar “better” than Sharpe and vice versa?
If you are trying to pick investments that will have a smoother ride (although ones that could have bigger max drawdowns), Sharpe is a better metric. If you are trying to pick investments that will have lower maximum drawdown and provide better “risk-adjusted returns,” Calmar is a better metric.
Since most advisors have the majority of their AUM with clients 50 and older, it’s my opinion that Calmar is a much better metric to use over Sharpe.
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Let’s see how it deals with Sharpe and Calmar Ratio
The following is a video showing how our OnPointe AI portfolio optimizer deals with Sharpe and Calmar. I think you’ll find the optimizer’s thoughts fascinating. To watch the video (NO SIGN-UP FORM REQUIRED), click on the following link: https://onpointesoftware.com/sharpe-vs-calmar-ratio
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