If you’re managing a portfolio for someone, they aren’t going to get angry at you if they suddenly have a surge in profits. They will only get nervous if they see volatility that causes losses.
Because C2 uses the Sharpe Ratio, a portfolio that has an unusually large profit will experience a drop in its Sharpe Ratio. This isn’t fair because sometimes a really good trade shows up and the system vendor wants to take advantage of it with more capital than than used on "average quality trades."
For those who aren’t familiar with the Sortino Ratio:
A variation of the Sharpe ratio which differentiates harmful volatility from volatility in general by replacing standard deviation with downside deviation in the denominator. Thus the Sortino Ratio is calculated by subtracting the risk free rate from the return of the portfolio and then dividing by the downside deviation. The Sortino ratio measures the return to “bad” volatility. This ratio allows investors to assess risk in a better manner than simply looking at excess returns to total volatility, since such a measure does not consider how often the price of the security rises as opposed to how often it falls. A large Sortino Ratio indicates a low risk of large losses occurring.
taken from investorwords.com
