Sortino Ratio

The Sortino Ratio, developed by Frank Sortino in the 1980s, fixes the most common objection to the Sharpe Ratio: volatility is symmetric, but no investor minds upside surprises. Sortino replaces total volatility with downside deviation — the standard deviation of returns below a target (usually zero or the risk-free rate). The intuition: penalise only the volatility that hurts.

Formula

σ_down = sqrt( mean( min(R_t − T, 0)² ) )
Sortino = ( R_p − T ) / σ_down

where T is the minimum acceptable return (typically R_f or 0). Annualisation uses the same √252 convention as Sharpe.

Sharpe vs Sortino in practice

For a symmetric return distribution, Sortino ≈ Sharpe × √2 (because exactly half the variance lives below zero). For positively skewed strategies — trend-following, options selling on the long side — Sortino can be materially higher than Sharpe; for negatively skewed strategies — short volatility, carry trades — Sortino flatters the truth less than Sharpe.

When to prefer Sortino

• ·Strategies with deliberate positive skew (trend-following, long convexity).
• ·Investors with loss aversion explicitly modelled (private clients, family offices).
• ·Reporting to a non-technical audience — "downside" reads more intuitively than "volatility".

How MEDGE Capital uses Sortino

Sortino is reported in every portfolio analysis alongside Sharpe and Calmar. Max Sortino is one of the 12 optimization objectives — useful when the input universe contains assets with asymmetric return profiles (commodities, long-vol overlays, factor tilts).