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Performance metrics

No single metric accurately captures the entire story or correctly provides the context for historical performance. Interactive Advisors provides access to a wide variety of strategies and investment methodologies and we believe in equipping you with metrics that let you analyze the past performance of each strategy. We describe each metric, how it is calculated and what it represents below. Along with defining the metrics, we illustrate values by considering two hypothetical portfolios with the following simulated performance:

Disclosure: The above chart is used for illustration and educational purposes and does not portray the results of any portfolios available for investment on the Interactive Advisors platform or in the market generally. The returns portrayed in the chart are not a reliable indicator of the performance or investment profile of any composite or client account. The above simulated returns do not represent actual trading and may not reflect the impact that material economic and market factors might have had on investments. The chart and corresponding metrics are used solely for the purpose of illustrating and explaining the concepts discussed below. Any risk metrics discussed in this presentation are for illustrative purposes only and do not represent the risk metrics of actual Interactive Advisors portfolios. The risk metrics are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account.

Time weighted returns

When measuring portfolio value, returns are simply the money gained or lost. We represent returns in percentage terms - the ratio of the gain (or loss) to the total portfolio value.

When choosing an investment it is important to view the asset’s performance over several time periods. For the hypothetical case we see both portfolios had similar 30 day and 365 day returns, but had significantly different returns at the 90 day mark.

Period Portfolio 1 Portfolio 2 Benchmark
Last 30 days 3.6% 3.8% 3.7%
Last 90 days 11.5% -5.5% 4.4%
Last 365 days 32.3% 32.1% 15.7%
See metric disclosures below

Risk metrics

The following metrics are only computed when the portfolio has at least one year (365 days) of returns. Interactive Advisors believes that the below risk metrics represent different measures of portfolio risk or portfolio risk-adjusted returns.

Volatility

Volatility or standard deviation, a proxy for the riskiness of a portfolio, measures the fluctuations in the daily returns.

Over the period under consideration, the two hypothetical portfolios achieve similar 365-day returns but follow very different paths to get there, with portfolio 1 being less volatile than portfolio 2.

Portfolio 1 Portfolio 2 Benchmark
Volatility 20% 38% 11%
See metric disclosures below

Sharpe ratio

The Sharpe ratio combines the time weighted returns and volatility to provide a risk-adjusted measure of portfolio performance. Since it is a risk-adjusted measure, the Sharpe ratio can be used to compare various portfolios and strategies. The higher the Sharpe ratio, the better the portfolio’s returns have been relative to the risk the portfolio manager has taken on.

Portfolio 1 Portfolio 2 Benchmark
Sharpe ratio 1.5 0.8 1.2
See metric disclosures below
Sharpe ratio

An in-depth look at the Sharpe ratio

Sortino ratio

Unlike the Sharpe ratio, which focuses on overall risk, some investors may want to evaluate portfolio returns for a given level of downside risk as opposed to total risk (as upside risk can be beneficial to the investors). The Sortino ratio is calculated by estimating the excess portfolio return over the risk-free return relative to its downside deviation (i.e. standard deviation of negative asset return).

It is also a risk-adjusted measure and can be used to compare various portfolios and strategies. The higher the Sortino ratio, the better the portfolio’s returns have been relative to the downside risk the portfolio manager has taken on.

Portfolio 1 Portfolio 2 Benchmark
Sortino ratio 2.6 1.2 1.4
See metric disclosures below
Sortino ratio

Maximum drawdown

Maximum drawdown is a measure of the maximum amount the portfolio lost over a specific time period. It offers investors a worst case scenario but it is an incomplete measure as it does not tell investors what the other drawdowns were in the period, what the frequency of the drawdowns is, how long it took for the loss to be recovered, or even if the loss was recovered.

Portfolio 1 Portfolio 2 Benchmark
Max drawdown 9.1% 33.2% 7.4%
See metric disclosures below

Value-at-risk (95%, 1 week)

When making an investment choice, it is important for investors to have a first impression of the potential loss and the probability of its occurrence within a pre-defined time frame. Value-at-risk is a forward looking metric that measures the potential loss in value of a portfolio over a defined period for a given confidence interval.

However, for our calculations, we assume normal distribution probability which in reality may underestimate the risk because it ignores all the extreme cases.

Portfolio 1 Portfolio 2 Benchmark
VaR 4.6% 8.8% 2.5%
See metric disclosures below
Value at risk

Bringing it all together

Let’s bring all of the concepts introduced above together to see what assessments we can make about each portfolio.

Risk is one of the most important factors an investor can assess before making an investment. In the example we see two portfolios with similar 365 day returns, but with vastly different risk profiles. An investor who is looking for larger returns, and has a greater tolerance for risk, may find Portfolio 2 to be an ideal investment.

An investor with a lower tolerance for risk may choose Portfolio 1 for its lower volatility and more consistent performance. No one strategy can guarantee results, but understanding an investment’s risks can help to eliminate emotional decision making.

Portfolio 1 Portfolio 2 Benchmark
30 day return 3.6% 3.8% 3.7%
90 day return 11.5% -5.5% 4.4%
365 day return 32.3% 32.1% 15.7%
Volatility 20% 38% 11%
Sharpe Ratio 1.5 0.8 1.2
Sortino Ratio 2.6 1.2 1.4
Max drawdown 9.1% 33.2% 7.4%
Value-at-risk 4.6% 8.8% 2.5%

Disclosure

These risk metrics are for illustrative purposes only and do not represent the risk metrics of actual Interactive Advisors portfolios. The risk metrics are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account.