The downside capture ratio is used in investment analysis to evaluate a fund's performance relative to a benchmark during market downturns. It quantifies how much of the benchmark's negative performance the fund captures when the market is declining. This ratio is particularly important for risk-averse investors or those focusing on risk management, as it provides insight into a fund's ability to mitigate losses in unfavourable market conditions.
A downside capture ratio of less than 100% indicates that the fund has experienced a smaller percentage of losses compared to the benchmark during market downturns. For instance, a ratio of 85% means that the fund captured only 85% of the benchmark's losses in a down market. This is generally favourable as it suggests that the fund has better protected its value against market declines. In rare instances, a negative downside capture ratio can occur, signifying that the fund actually achieved positive returns while the market was falling, which is an exceptionally desirable outcome for investors.
To calculate the downside capture ratio, the fund's returns are divided by the benchmark's returns, but only during periods when the benchmark has negative returns. This ratio helps investors understand a fund's relative performance in adverse market conditions. It is a useful tool for comparing funds, especially for those looking to minimise losses during market downturns. However, like all metrics, it should be used in conjunction with other analyses, such as the fund's overall risk profile, investment strategy and historical performance, to make well-rounded investment decisions.
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