Many traders and investment managers have the desire to measure and compare CTA managers and / or trading systems. Risk-adjusted returns are one of the most important measures to consider since, given the inherent / free leverage of the futures markets, more return can always be earned by taking more risk.
The most common risk-adjusted performance indicator is the Sharpe ratio. While the Sharpe ratio is definitely the most widely used, it is not without its issues and limitations. We believe the Sortino ratio improves on the Sharpe ratio in a few areas. However, the purpose of this article is not necessarily to extol the virtues of the Sortino ratio, but rather to review its definition and present how to properly calculate it since we have often seen its calculation done incorrectly.