# Hedge Fund Terms – S

Sortino Ratio – The Sortino Ratio is similar to the Sharpe Ratio, however instead of using a denominator constructed from the standard deviation, it uses Downside Deviation.  The Sortino Ratio was developed to make a difference between “good” and “bad” volatility in the Sharpe Ratio.

Sterling Ratio – This is a return/risk ratio. Return (numerator) is defined as the Compound Annualized Rate of Return over the last 3 years. Risk (denominator) is defined as the Average Yearly Maximum Drawdown over the last 3 years less an arbitrary 10%. To calculate this average yearly drawdown, the latest 3 years (36 months) is divided into 3 separate 12-month periods and the maximum drawdown is calculated for each. Then these 3 drawdowns are averaged to produce the Average Yearly Maximum Drawdown for the 3 year period. If three years of data are not available, the available data is used.

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