The Sterling Ratio is a drawdown-adjusted return metric similar to Calmar, but uses the average of the worst-N annual drawdowns (typically 3 years) plus a 10% penalty in the denominator: Sterling = CAGR / (Avg Worst-Year Drawdown + 10%). It is more stable than Calmar for long track-records because it doesn't depend on a single worst day.
Worked INR example
A multi-cap PMS strategy with 10-year CAGR 16%, worst-3-year average drawdown −20%. Sterling = 16 / (20 + 10) = 0.53. A long-only equity hedge fund: CAGR 14%, worst-3-year avg DD −12%. Sterling = 14 / 22 = 0.64. The hedge fund delivers better risk-adjusted return on Sterling basis despite the lower headline number.
When to use
- Long-horizon PMS / AIF / hedge-fund evaluation (10+ years of monthly data)
- Comparing strategies whose single worst day was an outlier (Calmar would over-penalise)
- Manager-allocator decisions where consistent risk-management trumps single peaks
SEBI caveat
Not standardised in Indian fund disclosures — institutional research only. Often shown by SEBI Cat-III AIFs and large PMSes. Verify the "worst-N years" lookback the provider used; some shops cherry-pick a favourable window.
Related terms: Calmar Ratio, Drawdown, Ulcer Index.