Two more rounds of college basketball have come and gone, which means it’s time to narrow our field of CTAs. So far, the metrics selected from our CTA ranking algorithm have focused on returns: In the first round of our Managed Futures Madness, the managers with the higher total rate of return advanced; in the second round, it was the managers with the best worst 3-year return.
But our rankings are about much more than returns – we place a heavy emphasis on risk management, as well. Because in the end, it’s all well and good for a program to post impressive returns, but if the program is taking on huge risk to achieve those returns, investors may end up watching in dismay as gains turn into losses when the going gets tough.
One of those risk management metrics was selected to determine which CTAs would advance past the 3rd round to our Elite 8: Sterling Ratio. What is the Sterling Ratio? This is how we explained it in the past when defining the metrics you’ll find on our rankings page:
Developed by Deane Sterling Jones, the Sterling Ratio is a risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sterling ratio measures return per unit of risk, with risk defined as the average annual drawdown. Theoretically, a higher Sterling ratio is better because it means that the investment is receiving a higher return relative to risk. The formula is: Sterling = (Compound ROR) / (Average Annual Drawdown – 10%).
This round didn’t produce quite as many bracket-busters as the previous one. The two remaining #1 seeds – Aspect Capital and Man AHL – both made it to the next round. But the two Cinderella stories of our tournament persisted: #10 seed White River won over #2 seed Mesirow and #11 seed Junzi Capital prevailed over #5 seed Briarwood.