What is the Sterling ratio?
The Sterling ratio is a way of measuring the risk attached to a hedge fund. The higher the ratio the better as this indicates that the hedge fund has a greater return relative to the expected level of risk.
Where have you heard about the Sterling ratio?
It’s not a term widely used outside of hedge fund circles, and has nothing to do with the British pound sterling currency. It’s so-called because it was developed by former investment portfolio company Deane Sterling Jones.
What you need to know about the Sterling ratio.
The investment world is littered with tools that compare risk. What’s different about the Sterling ratio is that it measures the average drawdown of a fund rather than the just the maximum drawdown. It’s calculated as a ratio between the fund's compounded annual return and the average maximum drawdown minus 10%.
Generally speaking, the time period used to calculate the ratio is three years, but this can be higher or lower depending on the investment.
Find out more about the Sterling ratio.
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