Return Over Maximum Drawdown (RoMaD)

It sounds like the sequel to an action movie. Like, two years ago, Maximum Drawdown was a surprise hit. So, this summer, we get Return Over Maximum Drawdown.

But, alas, no dope fight scenes here. Just a way to analyze hedge funds.

First, a bit about maximum drawdown. It measures the difference between a fund's maximum return and its low point. The value of a hedge fund will move around as the value of its investment positions change. Depending on what the fund invests in, it might move around a lot. As such, there might be points where the fund is posting a 25% gain for a particular period, then a few weeks later a 5% loss. The maximum drawdown measures this distance.

Return on maximum drawdown takes a fund's average return, and then divides it by the maximum drawdown. It compares the amount of return the fund typically shows with the breadth of the swings it suffers. It compares return with risk, allowing you to judge how much you might earn versus how volatile the fund is.