Upside/Downside Capture Definition
The upside/downside ratio is a statistical measure used in investment analysis to assess the performance of an investment manager or a specific investment strategy. It provides insights into how well an investment performs during positive market conditions (upside) compared to negative market conditions (downside). The ratio is calculated by dividing the up-market capture rate by the down-market capture rate.
The up-market capture ratio represents the percentage of the market's positive returns that an investment manager or strategy captures. It measures the ability of the investment to outperform the market during periods of positive performance.
On the other hand, the down-market capture ratio, represents the percentage of the market's negative returns that an investment manager or strategy captures. It measures the ability of the investment to limit losses during periods of market decline.
How we Calculate Upside/Downside Capture
The formula we use to calculate Upside/Downside Capture is:
**The benchmark used in each fund is the prospectus benchmark. If this is not available, we use the Technical Indicator benchmark as provided by our data providers.**
Example of when to consider:
The up-market calculates the percentage of the benchmark's positive return that the investment manager or strategy captures. A higher up-market capture rate indicates that the investment manager or strategy has performed well in positive market conditions, capturing a significant portion of the benchmark's gains. A low down-market capture rate suggests that the investment manager or strategy is able to provide some level of protection during market downturns.
By considering both measures, investors can assess how well the strategy performs over different market cycles and whether it has a consistent ability to outperform or preserve capital in both positive and negative market environments. A desirable outcome is a higher up-market capture rate and a lower down-market capture rate, indicating that the investment manager or strategy excels in both up and down market environments.
** The market capture ratios of passive index funds are expected to be very close to 100 per cent.**
Overall, the upside/downside ratio is a valuable tool for investors to evaluate an investment manager's ability to generate positive returns when the market is rising while also managing downside risk during market downturns. It helps provide a more complete picture of an investment's performance relative to the market across different market conditions.