Sterling ratio: a Calmar variant using average drawdown
The Sterling ratio is a Calmar-variant return-to-drawdown measure that swaps maximum drawdown for the average of the worst drawdowns over an evaluation period. It produces a less noise-sensitive single number for evaluating a strategy's risk-adjusted return profile, at the cost of being less responsive to genuine tail events.
What the Sterling ratio is
The Sterling ratio, in its original Deane Sterling Jones formulation, is defined as the compound annual return of a portfolio divided by the absolute value of the average annual maximum drawdown over the evaluation period, plus an additive constant of 10 percentage points: Sterling = CAGR / (|average max drawdown| + 10%). Subsequent variants drop the 10% constant; some use the average of the n worst drawdowns rather than the average of annual max drawdowns. The principle in every variant is the same: a return-to-drawdown ratio that uses an average rather than the single worst observation.
The motivation is the same as for Calmar—comparing the rate of wealth accumulation against the magnitude of the losses required to achieve it—but with a denominator that is more representative of what an investor would have experienced over the typical drawdown rather than the worst single one.
How it works
For a portfolio with a CAGR of 8% and annual maximum drawdowns of −12%, −18%, −22%, and −10% across four years, the average annual maximum drawdown is −15.5%. The Sterling ratio (using the variant without the 10% constant) is 8% / 15.5% = 0.52. The Calmar ratio over the same window, using the worst of the four drawdowns (−22%), would be 8% / 22% = 0.36.
The Sterling ratio is by construction higher than the Calmar ratio over the same period, because it divides by a smaller denominator. The two converge when the worst drawdown is close to the average; they diverge when one drawdown is materially larger than the others. A strategy with a single catastrophic drawdown surrounded by mild ones will score better on Sterling than on Calmar; a strategy with consistently moderate drawdowns will score similarly on both.
The ratio is unitless and scale-free, which means it can be directly compared across strategies, portfolios, and time periods. Higher is better, but the absolute level depends on the convention used (with or without the 10% constant) so comparisons should be made within a consistent definition.
What the evidence shows
The Sterling ratio is most commonly used in CTA and managed-futures evaluation, where it has been a standard reporting figure for several decades. Performance reports from major CTA databases show median Sterling ratios in the 0.3–0.7 range over multi-year evaluation windows, with the better-performing managers above 1.0.
Empirical comparison of Sterling and Calmar across the same return series typically produces Sterling values 1.3–1.5 times the corresponding Calmar values for diversified strategies, and ratios closer to 1.0 for strategies with very consistent drawdown profiles. The difference reflects the structural property that Sterling smooths over multiple drawdown observations rather than focusing on the single worst.
Limitations and trade-offs
The Sterling ratio's smoothing property is its main strength and its main weakness. By averaging multiple drawdowns, the metric is less sensitive to the noise of any single observation—useful for distinguishing genuine differences in risk-adjusted return between strategies. The same property makes it less responsive to tail events: a strategy with a single 60% drawdown surrounded by mild ones can show a respectable Sterling ratio while having delivered a clearly unacceptable risk experience.
The original Sterling formulation's additive 10% constant in the denominator is arbitrary and tends to compress differences between strategies. Modern variants typically drop it, but the choice of variant should be stated explicitly when reporting the ratio, because the same return series can produce materially different numbers under different conventions.
Like all drawdown-based metrics, Sterling depends on the evaluation window. A short window may exclude the strategy's worst drawdown entirely; a long window may include drawdowns from regimes that are no longer relevant. Comparing Sterling ratios across strategies requires consistent windows.
Sterling ratio in pfolio
The Sterling ratio is not currently displayed in pfolio Insights. Calmar ratio, maximum drawdown, the drawdown time series, and CAGR are all available; the Sterling ratio can be derived externally by combining CAGR with average drawdown depth from the same series.
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