Which ratio is used specifically for analyzing drawdown performance?

The Sterling Ratio is specifically designed to evaluate the performance of an investment with respect to its drawdown risk. The ratio is calculated by dividing the average annual return by the maximum drawdown, which provides insight into how much drawdown (loss from peak to trough) is experienced in relation to the returns generated. This focus on drawdown makes the Sterling Ratio particularly useful for investors who are sensitive to losses and seek to understand not just returns, but the risks associated with those returns.

In contrast, the Sortino Ratio, while also focused on downside risk, emphasizes only the negative volatility of returns rather than specifically analyzing drawdown metrics. The Sharpe Ratio, on the other hand, measures risk-adjusted return using standard deviation, which is a broader measure of total volatility and does not isolate drawdowns. Lastly, the Hurst Exponent is a measure used in time series analysis to determine the long-term memory of a time series, which is not directly related to performance drawdown analysis. This makes the Sterling Ratio the most appropriate choice for this specific purpose.