What the Sharpe ratio measures

The Sharpe ratio answers a simple question: how much return did this fund generate for each unit of risk it took? It’s calculated as the fund’s excess return (return minus the risk-free rate) divided by its standard deviation of returns.

A Sharpe of 1.0 means the fund generated one unit of return for every unit of risk. A Sharpe of 2.0 means two units of return per unit of risk. Higher is better. A negative Sharpe means the fund underperformed cash.

For context: the S&P 500’s long-term Sharpe ratio is approximately 0.4 to 0.5. Traditional hedge funds average around 0.6 to 0.8. The fact that the median crypto fund in our database has a since-inception Sharpe of 1.16 tells you something about the asset class: crypto offers higher returns per unit of risk over long periods, though with significantly more volatility and drawdown risk than traditional markets.

But don’t misread that number. The median is 1.16, not the mean. The mean Sharpe across our database is 1.83, but it’s pulled up by a handful of high-performing quant and arbitrage funds with Sharpe ratios above 5.0. The median gives you a better picture of what the “typical” fund looks like.

What counts as a good Sharpe ratio in crypto

A few important nuances. First, Sharpe ratios are time-period dependent. A fund that started in 2023 and captured a full bull run will show a higher Sharpe than one that includes the 2022 bear market. Always check whether you’re comparing since-inception, trailing 12-month, or trailing 24-month figures. Our database provides all three.

Second, very high Sharpe ratios (above 3.0) sustained over long periods should be investigated carefully. They can indicate genuine edge, but they can also indicate: illiquid holdings that are marked infrequently (smoothing the return stream), strategies with limited capacity that won’t accept your capital anyway, or reporting issues.

Sharpe ratios by strategy

This is where the data gets interesting. Different crypto fund strategies produce very different Sharpe profiles, and the ranking by Sharpe is not the same as the ranking by raw returns.

Quant funds lead at 1.53 median. This is consistent with what we see across all time periods. Quantitative strategies generate returns with less volatility because they can go short, hedge dynamically, and size positions algorithmically. The mean quant Sharpe is 2.49, higher than the median, because the best quant funds (particularly pure arbitrage strategies) post Sharpe ratios of 4.0 or above. Those numbers are real but represent small-capacity strategies that may not be accessible to most allocators.

Fund of funds rank second at 1.37 median. This may seem surprising given that FoFs had the worst raw returns in 2025 (-13.0% average). But Sharpe is a long-term measure, and FoFs benefit from diversification across managers, which smooths the return stream. Over a full cycle that includes both bull and bear markets, that smoothing effect produces an acceptable Sharpe even though the fee drag limits absolute returns.

Multi-strategy at 1.22 median. Middle of the pack, consistent with the strategy’s middle-of-the-road positioning on most metrics. The range within multi-strategy is wide: the best multi-strat funds post Sharpe ratios above 2.0, while the worst are below 0.5.

Long-only at 0.92 median. Below the 1.0 threshold. This tells you something important: the typical long-only crypto fund is not delivering risk-adjusted returns that justify the fees. You could get comparable or better Sharpe from a simple 60/40 BTC/ETH allocation with no management fee. Long-only funds need to demonstrate meaningful token selection alpha to justify their existence on a risk-adjusted basis.

Index/tracker at 0.55 median. The lowest of any category, and below the S&P 500’s long-term Sharpe. This is partly because many index/tracker products in our database are futures-based, which introduces contango drag that hurts risk-adjusted returns. Spot-based products would likely score higher, but we don’t yet have enough history to confirm that.

The Sortino ratio: a better measure?

The Sharpe ratio has a well-known flaw: it treats upside volatility the same as downside volatility. If a fund goes up 20% in one month and then 5% the next, that counts as “volatility” even though both months were positive. For investors, upside volatility is a feature, not a bug.

The Sortino ratio fixes this by using only downside deviation in the denominator. It measures return per unit of downside risk, which is arguably what most investors actually care about.

The median Sortino ratio across our database is 2.20 (since inception). That’s higher than the median Sharpe (1.16), which makes sense: when you remove upside volatility from the risk calculation, most funds look better. The averages are unreliable for Sortino because a handful of funds with very low downside deviation produce extreme outliers (some above 100).

Quant funds lead on Sortino as well, with a median of 3.25. This confirms that quant strategies not only have the best overall risk efficiency but specifically the lowest downside risk, which is what allocators with loss budgets care most about.

In practice, we recommend looking at both metrics together. The Sharpe tells you about overall volatility management. The Sortino tells you about downside protection. A fund with a good Sharpe and a great Sortino is managing downside risk especially well. A fund with a decent Sharpe but a mediocre Sortino may have similar overall volatility but worse behavior during drawdowns.

What 2025 taught us about risk-adjusted returns

2025 was a natural experiment in the value of risk-adjusted metrics. In a year when Bitcoin fell 6.3% and the average crypto fund returned -7.2%, did funds with higher historical Sharpe ratios actually hold up better?

The answer is yes. Quant and multi-strategy funds, the two categories with the highest median Sharpe ratios (1.53 and 1.22), were also the two categories with the smallest 2025 losses (+0.4% and -2.4% respectively). Long-only and index/tracker funds, with the lowest Sharpe ratios (0.92 and 0.55), had the worst 2025 performance (-15.3% and -24.4%).

This is not a coincidence. High Sharpe ratios reflect a process: disciplined position sizing, active hedging, loss cutting, and diversification. Those processes work in bull markets and bear markets, but their value is most visible during drawdowns. A fund with a 1.5 Sharpe is telling you something about how it will behave when things go wrong, and 2025 confirmed that signal.

For more on 2025 returns, see our annual performance review and best performing crypto funds rankings.

Limitations and common mistakes

Time-period sensitivity. A fund that launched in January 2023 has a Sharpe calculated only during a bull market. Its number will look better than a fund with the same skill that launched in 2021 and went through the bear. Always check the inception date and compare Sharpe ratios across funds with similar track record lengths.

Smoothing bias. Funds with illiquid holdings (VC positions, locked DeFi tokens, OTC deals) may report smoother return streams than their actual risk warrants. This artificially inflates their Sharpe ratio. If a fund’s returns look unusually smooth, ask how it values illiquid positions.

Survivorship bias. Our database Sharpe ratios include only funds that are currently reporting. Funds that blew up and closed (often with very negative Sharpe ratios) are not in the dataset. The true industry Sharpe is probably lower than what we report. We track 409 dead funds separately.

Risk-free rate assumption. In a zero-rate environment, the risk-free rate doesn’t matter much. With US Treasuries yielding 4-5% in 2025-2026, the risk-free rate assumption can change Sharpe ratios meaningfully. Our database uses the prevailing T-bill rate, but always check what rate was used when comparing across data sources.

Sharpe is backward-looking. Past risk-adjusted returns do not guarantee future risk-adjusted returns. A fund’s process can change, key people can leave, and market conditions can shift. Use Sharpe as one input into a broader evaluation, not the sole criterion. See our manager evaluation guide for the full framework.

FAQ

What is a good Sharpe ratio for a crypto fund?

In crypto, above 1.0 is good, above 1.5 is very good, and above 2.0 is excellent. The median since-inception Sharpe across our database of 307 funds is 1.16. For comparison, the S&P 500’s long-term Sharpe is about 0.4-0.5. Sustained Sharpe above 2.0 over 3+ years is rare and usually indicates a genuinely differentiated strategy.

Which crypto fund strategy has the best Sharpe ratio?

Algorithmic/quant funds lead with a median since-inception Sharpe of 1.53 (mean: 2.49). Within the quant category, pure arbitrage and market-neutral sub-strategies tend to have the highest Sharpe ratios, often above 2.0. Fund of funds rank second at 1.37, benefiting from diversification. Long-only is lowest among active strategies at 0.92.

Is the Sharpe ratio or Sortino ratio more useful?

Use both. The Sharpe measures total volatility management. The Sortino measures downside risk management specifically. For most institutional allocators who have loss budgets and drawdown limits, the Sortino is arguably more relevant. The median Sortino across our database is 2.20, higher than the median Sharpe (1.16), because removing upside volatility from the denominator makes most funds look better. Look at both together for the fullest picture of a fund’s risk efficiency.

Can I trust very high Sharpe ratios?

Be cautious with Sharpe ratios above 3.0 sustained over long periods. They can indicate genuine skill (certain arbitrage strategies), but they can also indicate smoothing bias from illiquid holdings, limited and declining capacity, or short track records that haven’t been tested through a bear market. Verify by looking at the fund’s drawdown history and asking how they value illiquid positions.

How does the CFR database calculate Sharpe ratios?

We calculate Sharpe ratios using net-of-fee monthly returns, annualized, with the prevailing US Treasury bill rate as the risk-free rate. All calculations are applied consistently across every fund in the database. We provide since-inception, trailing 24-month, and trailing 12-month Sharpe ratios so you can see how risk-adjusted performance has evolved over different time periods.

Where can I see Sharpe ratios for individual crypto funds?

The CFR Performance Database includes Sharpe ratios (SI, 24M, 12M), Sortino ratios, max drawdown, and 60+ other risk metrics for hundreds of funds. You can sort by Sharpe ratio, filter by strategy, and compare funds side by side. A free sample is available to see what the data looks like.