Comparing Drawdown and Partial-Moment Risk-Adjusted Return Metrics
Summary
The article reviews alternatives to the Sharpe ratio and implements them for hypothetical equity curves generated from S&P 500 returns. Its drawdown measures include two versions of the Burke ratio, using either net profit or mean returns over an aggregate of selected large drawdowns, and a net-profit-to-maximum-drawdown ratio. It also introduces partial-moment measures that compare downside and upside relative to a chosen return threshold, and discusses the omega metric.
Simulated curves illustrate that different metrics can rank the same return paths differently: the curve with the highest return does not necessarily score best. The author explains that drawdown-based ratios avoid assumptions about normally distributed returns, but their use of absolute drawdowns can favor smoother declines and may overstate risk relative to measures based on negative-return distributions. The examples are hypothetical and the implementations are not annualized. The article recommends considering multiple metrics, since no single retrospective statistic captures all relevant risks or guarantees future performance.
Key ideas
- The Burke ratio aggregates selected large drawdowns in its risk denominator, while the net-profit-to-maximum-drawdown ratio uses the single largest drawdown.
- Partial-moment measures assess returns relative to a threshold by focusing separately on gains or losses.
- Different risk-adjusted metrics can rank the same equity curves differently.
- Drawdown-based ratios avoid a normality assumption but can favor strategies with mild downward spikes.
- The simulated examples are illustrative, the reported implementations are not annualized, and historical metrics do not ensure future results.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.