Sterling Ratio

AAA

DEFINITION of 'Sterling Ratio'

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:

Sterling Ratio



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 EXPLAINS 'Sterling Ratio'

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 TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  3. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  4. Peak-To-Valley Drawdown

    A fund or money manager's largest cumulative percentage decline ...
  5. Hedge Fund

    An aggressively managed portfolio of investments that uses advanced ...
  6. Calmar Ratio

    A comparison of the average annual compounded rate of return ...
Related Articles
  1. Taking A Look Behind Hedge Funds
    Mutual Funds & ETFs

    Taking A Look Behind Hedge Funds

  2. Hedge Funds: Higher Returns Or Just ...
    Options & Futures

    Hedge Funds: Higher Returns Or Just ...

  3. Hedge Funds Hunt For Upside, Regardless ...
    Options & Futures

    Hedge Funds Hunt For Upside, Regardless ...

  4. Hedge Fund Fees: Exotic Expenses
    Investing Basics

    Hedge Fund Fees: Exotic Expenses

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center