The Sterling Ratio is a risk-adjusted return metric similar to Calmar but uses the average annual drawdown rather than maximum drawdown — making it less sensitive to a single outlier crash event.
Sterling Ratio = Annualised Return ÷ (Average Annual Maximum Drawdown − 10%). The subtraction of 10% is a traditional convention to ensure a minimum threshold. While the Calmar Ratio uses the single worst drawdown ever, the Sterling Ratio averages the annual maximum drawdown over the evaluation period (typically 3 years), then subtracts 10%. This makes it less susceptible to a single extreme event dominating the metric and provides a more consistent view of average downside risk management.
Sterling Ratio is the 'average bad year' version of the Calmar Ratio. Instead of asking 'what's the worst it's ever been?', it asks 'what's the typical bad year like?' A fund that had one catastrophic year but was excellent in all other years will have a good Calmar but a worse Sterling. If both Calmar and Sterling are high, the fund is genuinely good at managing risk — both in typical bad periods and extreme events.
Calculate the maximum drawdown for each calendar year in the evaluation period.
Average these annual maximum drawdowns.
Sterling Ratio = Annualised Return ÷ (Avg Annual Max Drawdown − 10%).
Higher is better.