Revealing the 10% in the Sterling Ratio

We truly love hearing what our readers think about our research and writings. We love it even more when they can help provide additional information, and start a conversation. Today, we got an email from, Curt Breitfuss, owner of Jones & Company, offering not only new information on our post yesterday, but a little bit of history on the Sterling Ratio that we couldn’t resist sharing with all of you. As a reminder, we delved into explaining the Sterling Ratio. Here is the equation again.

Sterling Ratio = (Compound ROR) / ABS(Avg. Ann DD – 10%)

Even after a good amount of research, we were unable to definitively define what that arbitrary 10% represented. So, we provided our own take of what it might mean. Breitfuss offers some insight as to the origins of the 10% in the ratio. Turns out, friend of the blog, Jeffery Jones of Alpine Advisor is the son of Sterling ratio creator, Deane.

The ratio was invented by my father-in-law and Jeff Jones’ dad, Deane Sterling Jones.  To clarify the reason he (Deane Sterling Jones used 10% in the denominator was to compare any investment with a return stream to a risk-free investment (T-Bills). He invented the ratio in 1981 when t-bills were yielding 10%. Since bills did not experience drawdowns (and a ratio of 1.0 at that time), he felt that any investment with a ratio greater than 1.0 had a better risk/reward tradeoff. The average drawdown was always averaged and entered as a positive number and then 10% was added to that value.

We used the ratio to choose Paul Tudor Jones, Louis Bacon and Monroe Trout in 1987/1988 as our initial allocations within the High Sierra Fund. After Deane’s passing in 1993, we did not continue to promote or use the ratio in a public fashion as Deane had done.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.