Sortino Ratio and Sharp ratio: Sortino Ratio is similar to Sharp ratio, but the difference is that it distinguishes good and bad fluctuations, so the downward standard deviation is used instead of standard deviation when calculating volatility. The implicit condition is that the rise of portfolio (positive rate of return) meets the needs of investors and should not be included in risk adjustment. Similar to Sharp's ratio, the higher this ratio, the higher the excess rate of return that the fund can obtain if it bears the downside risk of the same unit. Sortino ratio can be regarded as a correction to measure Sharp ratio of hedge fund/private equity fund.

We can compare the difference between Sharp's ratio and Sodino's ratio through a special case. To simplify the calculation, the risk-free interest rate is set at 0%.

Assume that the net value of private equity funds A and B at the beginning of 2009 is 1.00, and their monthly net value announcement dates are the same. In 2009, the monthly income of private fund A was 3%, -5%, -2%, -2%, -2%, -2%, 5%, 3%, 10% and 9% respectively. In the same period of 2009, the monthly income of private equity fund B was 3%,-1%, 1%,-1%,-1% respectively. Through calculation, we get that the total income of two private equity funds in 2009 is 25.6%, but the Sharp ratio of private equity fund A is slightly higher than that of private equity fund B (1.47). However, if we calculate the Sotino ratio, we will find that the Sotino ratio of private placement A (3.6) is much lower than that of private placement B (9.5).

The main difference is that in the process of calculating Sharp ratio, private equity B was "punished" when calculating risk adjustment because of the sudden sharp increase in income in the last two months. In the process of calculating the sortino ratio, any increase above the risk-free interest rate will not be included in the risk adjustment. Therefore, the increase of private placement B in the last two periods will not lead to the decrease of sortino proportion. Compared with Sharp ratio, Sotino ratio is more suitable for investors who are more sensitive to the decline of asset value.