A ratio used mainly in the context of hedge funds. This risk-reward measure determines which hedge funds have the highest returns while enduring the least amount of volatility. The formula is as follows:
This formula uses the average for risk (drawdown) and return over the past three years. Drawdown is calculated at the maximum potential loss in the given year.
Investopedia Says:
Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment(s) are receiving a higher return relative to risk.
The Sterling ratio is similar to the Sharpe ratio and the Sortino ratio, as it also produces a risk-adjusted return measurement. The Sterling ratio, along with the Sortino ratio, is primarily used by hedge funds as a way of advertising superior risk management.
Related Links:
Learn everything you need to know about the characteristics and strategies of hedge funds. Introduction To Hedge Funds - Part One
Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one. Introduction To Hedge Funds - Part Two
Some of these claim consistent returns even in declining markets, but they're not immune to risk! Taking A Look Behind Hedge Funds
