Down-Market Capture Ratio

Investment managers have a singular goal: make money. But it doesn't always happen. Sometimes it's because the manager put all the firm's money into Fyre Festival 2. Other times, the manager is invested in the market when the entire market goes down, and she shoulda held cash. The general market drops and the fund loses money along with everyone else.

In those times, when the fund loses money because the general market is down, how do you know whether a fund manager did a good job or not? They lost money. But everyone lost money.

You need some kind of benchmark. Enter the Down-Market Capture index. It provides a way to measure the performance of a fund manager when the overall market is down. It's a kind of relative strength index or relative performance metric.

Every fund has a benchmark index. You run a fund that invests in technology stocks. To figure out whether or not you're doing a good job, you compare your performance to an index fund that tracks the overall technology space, something like the Nasdaq-100 Technology Sector Index. (And you had better beat that number consistently, because index funds are cheap for the investor...like 0.3% or so a year to manage versus a mutual fund paying your fat fee of 1% or more a year.)

To see how you did, you compare how your fund performed compared to the performance of the Nasdaq-100 Tech index. If the Nasdaq-100 fell 7% and your fund only fell 5%, you did all right. If your fund fell 10%, then maybe you should consider going back to law school.

Here's how you figure out the Down-Market Capture Index. Take your performance and the performance of the benchmark. Figure out the ratio between the two. Multiply the answer by 100. If the answer is above 100, you beat the market. If the answer is below 100, you'll need to fix your performance, or your clients will start looking elsewhere.