What Is the Up-Market Capture Ratio?
I'm here to explain the up-market capture ratio, which is a statistical measure of how an investment manager performs in up-markets compared to a benchmark index. You use it to see how well the manager did when the index was rising.
You can compare this with the down-market capture ratio, and in practice, you'll want to look at both together.
Key Takeaways
- The up-market capture ratio shows a manager's relative performance in bull markets.
- You calculate it by comparing the manager's returns in up-markets to the benchmark index.
- Always consider both up- and down-market capture ratios to get the full picture of a manager's performance.
Calculating the Up-Market Capture Ratio
To calculate the up-market capture ratio, divide the manager's returns by the index returns during the up-market and multiply by 100. The formula is: Up-Market Capture Ratio = (Manager’s Returns / Index Returns) × 100, where MCR is the market capture ratio, MR is the manager’s returns, and IR is the index returns.
Understanding the Up-Market Capture Ratio
If a manager has an up-market ratio over 100, that means they've outperformed the index during the up-market. For instance, a ratio of 120 shows they beat the market by 20% in that period. I find many analysts include this in their evaluations of managers.
When an investment mandate requires meeting or exceeding a benchmark's return, this ratio helps you spot managers who are succeeding. It's particularly useful if you're into active investing and focus on relative returns, not absolute ones like hedge funds do.
Special Considerations
This ratio is one of several indicators analysts use to identify strong money managers. Since it only looks at upside movements and ignores losses, some critics argue it pushes managers to take big risks. But when you combine it with other metrics, it provides solid insights.
You should also look at the down-market capture ratio, calculated similarly but with down-market returns. Comparing both can show that even a manager with a high down-market ratio or weak up-market ratio might still outperform overall.
Here's a tip: Passive index funds should have market capture ratios very close to 100%.
Example of How to Use the Up-Market Capture Ratio
Suppose the down-market ratio is 110 but the up-market ratio is 140; that means the manager offset poor down-market performance with strong up-market results.
You can quantify this by dividing the up-market ratio by the down-market ratio to get the overall capture ratio. In this case, 140 divided by 110 gives 1.27, showing the up-market gains more than cover the down-market losses.
It works the other way too: If the up-market ratio is 90 but the down-market is 70, the overall ratio is 1.29, indicating overall outperformance.
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