What Is Martin ratio?
The Martin ratio, also called the Ulcer Performance Index (UPI), is a risk-adjusted return measure. It divides an investment’s excess return by its Ulcer Index, using drawdown severity as the risk measure rather than total standard deviation (as in the Sharpe ratio) or downside deviation (as in the Sortino ratio). Peter Martin introduced the measure alongside UI.
A higher Martin ratio indicates more excess return for each unit of measured drawdown risk. Because UI incorporates the depth and persistence of all drawdown observations in the selected window, the ratio penalises a strategy that remains below prior highs more than one that quickly recovers from a similar decline. It is therefore a useful complement to the Calmar ratio, whose denominator is only the single worst maximum drawdown. It does not, however, eliminate the need for adequate history or a consistent calculation window.
Formula
Martin ratio = (R_p - R_f) / UI
R_p is the portfolio’s total return, R_f is the return on the chosen
risk-free rate investment, and UI is the Ulcer Index. The return
and risk-free rate must use the same evaluation period and annualisation
convention; the UI must be calculated from the same period’s value series.
Comparisons are meaningful only when all candidates use the same dates,
frequency, return treatment, and UI convention.
Pros
Relates excess return to both the depth and persistence of drawdowns
Uses all drawdown observations, not just the single worst episode
Complements variance-based measures such as Sharpe and Sortino
Easy to calculate once the Ulcer Index is available
Cons
Sensitive to the UI look-back, sampling frequency, and return convention
A high value can reflect an unusually benign sample that omitted a major drawdown
Literature and references:
See also