Sortino Ratio Calculation

Sortino Ratio Calculation involves determining the excess return of an investment relative to its downside deviation. It provides a clearer view of risk-adjusted performance than the Sharpe ratio for strategies with asymmetric return distributions.

Since crypto returns are often non-normal and exhibit fat tails, the Sortino ratio is frequently more useful. It helps traders identify if their returns are coming from smart risk-taking or simply taking on unnecessary downside risk.

The calculation requires defining a minimum acceptable return or hurdle rate. This metric is a cornerstone of performance evaluation for professional crypto funds.

It allows for a more nuanced understanding of how a strategy performs during adverse market conditions.