Forget Returns!

One of the least significant statistics of any manager or trading system is its returns. Returns alone tell investors nothing about the risk required to reach those returns. For example, how do we know if a 100% return is good or bad? The answer should be "it depends on the risk required to get it". Who cares if a few people made 100% return if an even greater percentage of the investors lost all their money first!

What does matter is RISK ADJUSTED RETURNS. Once we know how large of a risk a system or manager took to reach a return it is then we can properly evaluate 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 yearly percentage return divided by the largest percentage drawdown. It is necessary 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 system had an average yearly return of 30% and at one time had a maximum drawdown of 15% then his MAR Ratio would be 2. In others words, 30 divided by 15 = 2.

What is an excellent MAR Ratio? To determine this, I think one of the best places to look is at the world of professionally managed money. These managers are often the best of the best when it comes to traders. In some cases, they have track records 20 and 30 years old and have hundreds of millions or even billions of dollars under management. When we look at the best of those managers, they are LUCKY if they are able to maintain a MAR Ratio of 1! Meaning, if they have made an average of 30% a year, then they also likely had a onetime largest drawdown of 30%.

I hope this sets off a few 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 percent of the time they took more risk than a trader would probably ever want to take.

This article is about realism, and what I think is truly possible with top caliber trading systems and money managers. Keep in mind, I have developed trading systems for over 18 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 investment capital.

So what do I think is possible? The answer is a MAR Ratio of about 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 heave 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%; however, the drawdown will go up to about 34%. In other words, it will maintain that roughly 2 to 1 ratio.

For a free video series on successful futures trading from award winning trading systems developer Dean Hoffman please visit us at http://www.relativitytradingsystem.com

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