Martin Ratio

What is the Martin ratio?

The Martin ratio, also called the Ulcer Performance Index or return over Ulcer Index, is a risk-adjusted performance measure that divides a strategy's excess return by its Ulcer Index. The Ulcer Index, developed by Peter Martin and Byron McCann in the late 1980s, is the root-mean-square of the percentage drawdowns from the running equity peak, so it grows with both the depth and the duration of drawdowns. The ratio therefore scores growth per unit of sustained drawdown pain.

The measure exists to fix weaknesses on both sides of the usual trade-off. The Sharpe ratio penalizes upside volatility, which most traders do not consider risk, while the Calmar ratio hangs its entire risk estimate on the single worst drawdown, a noisy one-event statistic. By averaging squared drawdown depths across every bar of the test, the Martin ratio uses all of the downside information in the equity curve: a strategy that spends months underwater scores worse than one that dips briefly and recovers, even if their maximum drawdowns match.

Traders care because the denominator matches lived experience: time spent below the high-water mark is what erodes discipline and investor confidence. As a statistically fuller use of the drawdown record, many practitioners consider it one of the better single-number summaries for comparing systems, while acknowledging it remains backward looking like every performance ratio.

How it's calculated

The Martin ratio divides excess return by the root-mean-square drawdown of the equity curve.

The Ulcer Index depends on sampling frequency; daily equity marks are the common convention.

Squaring the drawdowns weights deep declines disproportionately, which is intentional.

How traders use it

• System comparison: when two strategies show similar returns, the higher Martin ratio identifies the one whose equity curve spent less time and depth underwater, often a better guide to tradability than Sharpe rankings.
• Fund and portfolio screening: the ratio is used to rank funds by growth per unit of drawdown stress, where it frequently reorders lists produced by volatility-based measures, especially for smooth-but-occasionally-gappy return profiles.
• Complementary reporting: because it aggregates all drawdowns while Calmar isolates the worst one, practitioners often report both, using disagreement between them as a prompt to inspect the full drawdown record.
• Limitations: the ratio is less familiar than Sharpe so comparisons across sources are harder, it is sensitive to the equity sampling frequency, and like all backward-looking ratios it can rank a strategy highly right up until its first genuinely deep drawdown.

Martin ratio vs. related concepts