Rachev Ratio

The Rachev Ratio, introduced by Svetlozar Rachev (2004), is a tail-focused performance measure that compares the magnitude of right-tail gains to left-tail losses. Where Sharpe uses the mean and the full volatility, Rachev uses only the tails — making it the most appropriate measure for strategies with deliberate asymmetry.

Formula

R_(α, β) = E[ R | R ≥ VaR_α ]   /   |E[ R | R ≤ −VaR_β ]|

Common choices are α = β = 0.95 — the average return in the best 5% of periods divided by the average loss in the worst 5%. The Rachev Ratio at α = β = 0.5 collapses to the gain-to-loss ratio at the median.

When Rachev beats Sharpe

• ·Skewness-aware: strategies designed to capture positive skew (trend-following, long volatility) score very high on Rachev relative to Sharpe.
• ·Tail-aware: strategies that take fat tail risk (short volatility, carry) score low on Rachev even when Sharpe is high.
• ·Crisis robustness: by construction Rachev penalises strategies whose left tail is fat, even if the centre of the distribution is well-behaved.

How MEDGE Capital uses Rachev

Max Rachev is one of the 12 portfolio optimization objectives. The α / β confidence levels default to 0.95 but can be set independently — useful when investor risk preferences are asymmetric (e.g. less concerned about extreme upside, very concerned about extreme downside).