Down-Market Capture Ratio
Investment managers have a singular goal: make money. But it doesn't always happen. Sometimes it's because the manager put all the firm's money into Fyre Festival 2. Other times, the manager is invested in the market when the entire market goes down, and she shoulda held cash. The general market drops and the fund loses money along with everyone else.
In those times, when the fund loses money because the general market is down, how do you know whether a fund manager did a good job or not? They lost money. But everyone lost money.
You need some kind of benchmark. Enter the Down-Market Capture index. It provides a way to measure the performance of a fund manager when the overall market is down. It's a kind of relative strength index or relative performance metric.
Every fund has a benchmark index. You run a fund that invests in technology stocks. To figure out whether or not you're doing a good job, you compare your performance to an index fund that tracks the overall technology space, something like the Nasdaq-100 Technology Sector Index. (And you had better beat that number consistently, because index funds are cheap for the investor...like 0.3% or so a year to manage versus a mutual fund paying your fat fee of 1% or more a year.)
To see how you did, you compare how your fund performed compared to the performance of the Nasdaq-100 Tech index. If the Nasdaq-100 fell 7% and your fund only fell 5%, you did all right. If your fund fell 10%, then maybe you should consider going back to law school.
Here's how you figure out the Down-Market Capture Index. Take your performance and the performance of the benchmark. Figure out the ratio between the two. Multiply the answer by 100. If the answer is above 100, you beat the market. If the answer is below 100, you'll need to fix your performance, or your clients will start looking elsewhere.
Related or Semi-related Video
Finance: What Are ETFs?275 Views
Finance allah shmoop shmoop what are efs Well first this
is the random financial terms you want to be asked
in the financial term spelling bee and second you should
know that e t f stands for exchange traded fund
f's are kissing cousins of index funds with one key
subtle but important difference f don't change at least generally
speaking an index fund might reflect the transportation industry and
have so much exposure to ford gm united airlines tesla
etcetera But it's required tohave say sixty five percent of
its exposure to companies based in the united states in
its charter every month that index fund has to re
balanced that exposure So if the auto companies do very
poorly in a given month index fund has to re
balance by buying mohr shares of those auto companies to
make up the difference you know given that they've performed
poorly relative toa airlines trucking company's railroads jeff howard segways
and so on But in a t f the fund
is basically set once and the shares just really kind
of float if over a decade the auto companies do
really well then in an e t f the auto
companies will just have a dominant influence on the overall
performance of the fund The management company doesn't have to
buy and sell shares regularly in an e t f
till fulfill the legal promises it agreed to at the
outset of the fund in the way in index fund
re balances its shares by buying and selling them So
what does that mean to you Well it means that
fc may drift in given directions like this guy For
example a generic technology e t f might have had
a total exposure of say five percent to internet stocks
in the beginning of nineteen ninety seven but amazon ebay
yahoo netflix and a well performed massively better than the
broader technology market which did well but just not omg
dot com well so that five percent waiting twenty years
later might be more like fifty percent or mohr of
that particular e t f but one other key aspect
of it is that it's traded like a stock i
e in one block and trade throughout the day there's
a bid and an ask price The bids are all
added up and shares in the fund can be bought
And sold at any time throughout the day Although the
market sets the price of an f just like it
does on a stock Well there now you're all ready
for the financial term spelling bee And they might also
ask you to spell lipo Yeah you might want to 00:02:33.69 --> [endTime] write that one on your arm
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