What is the Ulcer Index?
The Ulcer Index measures the depth and duration of drawdowns from prior peaks. Unlike Max Drawdown (which captures only the single worst point), the Ulcer Index reflects the overall pain of being underwater - how deep, how long, and how often.
Formula
Where percentage drawdown on day i = ((NAVi − Peaki) / Peaki) × 100
Peaki = highest NAV up to day i
Days at a new peak contribute 0 to the sum. Days below the peak contribute their squared drawdown.
Example
Why Ulcer Index Differs from Max Drawdown
Two funds both had −15% max drawdown:
Fund A: Hit −15%, recovered in 2 weeks. Rest of the year was at or near peaks.
Fund B: Hit −15%, took 6 months to recover. Spent most of the period underwater.
Max Drawdown is identical (−15%), but Fund B has a much higher Ulcer Index because
it spent far more time in drawdown. Fund B was the more "ulcer-inducing" investment.
How to Interpret
- Lower is better - a lower Ulcer Index means a smoother ride with shallower and shorter drawdowns.
- A fund that drops sharply but recovers quickly will have a lower Ulcer than one that slowly bleeds and stays underwater.
- Typical values: aggressive equity funds might show 8-15+, while conservative balanced funds might be 3-6.
- Useful for comparing funds with similar max drawdowns - Ulcer Index reveals which one was actually more painful to hold.
Important Notes
- Computed from daily NAV data within the selected evaluation period.
- The squaring of drawdowns means deeper drawdowns are penalized disproportionately (similar to how standard deviation penalizes large deviations).
- Named by Peter Martin (1987) - literally measures how much "ulcer pain" an investment causes.
- Complements Max Drawdown: Max DD tells you the worst single drop, Ulcer Index tells you the overall drawdown experience.
- Period-dependent: a fund measured over a bull market will have a much lower Ulcer Index than the same fund measured through a crash.
Related metrics
More Advanced Risk methodology from the MFPRO analytics tool: