Can I keep my Sharpe ratio higher then 4 for the rest of the year?

Rol · Apr 19, 2012

From what I gather, a large percentage gain relative to the norm, could hurt your Sharpe ratio as much as a large draw down, because Sharpe does not distinguish plus from minus. So what is the use? It gives you a false sense of security. Just ask Madoffâs investors.

heech · Apr 19, 2012

Quote from Rol:

From what I gather, a large percentage gain relative to the norm, could hurt your Sharpe ratio as much as a large draw down, because Sharpe does not distinguish plus from minus. So what is the use? It gives you a false sense of security. Just ask Madoffâs investors.

True, so you can use Sortino as an alternative if you'd prefer. But from everything I've seen, Sharpe and Sortino are closely correlated with enough trading history. That is, no reason to think there are a lot of strategies out there with a positive skew.... trend followers tend to argue otherwise.

d08 · Apr 19, 2012

Quote from heech:

The financial rewards of managing OPM is obvious (it's free upside leverage: increase your gains without affecting downside), which is not to say choosing to manage OPM is the choice for everyone, for any number of reasons.

Again, I have no idea what rallymode's performance is. I will just repeat myself: his Sharpe is apparently double the highest Sharpe of ANY professional manager, of any scale. It's not interesting that HE doesn't want other OPM, but what's interesting is that literally zero others professionals who we know want to trade OPM can achieve half of what he has.

By the way, his daily P&L shows daily gains of $100-300k... That suggests his strategy is at least $5-10mm in capacity.

It's not impossible but it is interesting.
OPM carries a lot of other baggage with it, it's not nearly as easy as just opening a brokerage account.
Then there are the borderline personalities who rather not work in a social setting.

Quote from Rol:

From what I gather, a large percentage gain relative to the norm, could hurt your Sharpe ratio as much as a large draw down, because Sharpe does not distinguish plus from minus. So what is the use? It gives you a false sense of security. Just ask Madoffâs investors.

That's where the Sortino ratio comes in.

macintash · Apr 19, 2012

Quote from heech:

Just my 2 cents... Sharpe ratio is meaningless from a manager evaluation point of view, (especially on a short time frame) without a deep understanding of how/what you're trading.

Simple example: if you're doing some kind of mean reversion / martingale / doubling down on losses... every single closed trade will be profitable until the one that puts you out of business. Same is certainly true for naive option writing strategies.

So, if the intent of this journal is to impress potential investors with your performance, you need to get a lot more specific about what you're trading and how you're trading it.

I'm not necessarily trying to impress potential investors here & I have no intention to go into more specifics here on ET , but I'm pretty excited on my preformance so far this year, not so much the sharpe ratio, but the max DD of less then 2% P to V. Its not easy & I knew that when I made the goal for the year, and I keep updating the journal how I'm doing relating to my targets (see the first pages).
So far YTD I have met my goals, should I be able to finish the year with similar results it would be a major acomplishment for me.

rallymode · Apr 20, 2012

Quote from heech:

I'm not going to debate your "intent", as the time and effort needed to audit your records isnt worth the ego boost I get from winning an Internet debate. I have no idea what your performance is.

Then perhaps you shouldnt begin an argument you are not willing or capable of finishing.

Quote from heech:

As far as capacity, CTAs listed on those sites range from the tens of thousands to the tens of billions in AUM. I find it rather striking that none, not a single professional manager, has a Sharpe that's remotely in the league of of what you're quoting over the past 5 years. I guess we will just have to leave open the question why no one able to achieve a Sharpe even half of yours is willing to "put up" with having their numbers publicly scrutinized.... even when the financial rewards of managing OPM is obvious.

Obvious? Hardly. Once you've reached a certain level, there are more important things in life than maximizing PNL any further. Once you take in outside money you become an employee, to many that's not quite the obvious choice.

heech · Apr 20, 2012

Perhaps it's all just a coincidence, then, that trading superstars all seem to fear public scrutiny and "becoming an employee".

macintash · Apr 20, 2012

So far there have been 2 types of comments here. Some argue that high Sharpe dosent mean a thing, others OTOH say high Sharpe is immpossibe (some actually argue both). IMHO high sharpe is possibe but dificult, and high sharpe means a lot especially if it is combined with low DD & high return. I'm glad "rallymode" was ready to share his expiriance here & I would encourage other high sharpes to share their results with us.

heech · Apr 20, 2012

Quote from macintash:

So far there have been 2 types of comments here. Some argue that high Sharpe dosent mean a thing, others OTOH say high Sharpe is immpossibe (some actually argue both). IMHO high sharpe is possibe but dificult, and high sharpe means a lot especially if it is combined with low DD & high return. I'm glad "rallymode" was ready to share his expiriance here & I would encourage other high sharpes to share their results with us.

No, if you read carefully, the two criticisms can be easily merged:

- Sharpe is a very flawed measure of skill (or attractiveness of investment) for some strategies,

- for those strategies in which Sharpe is even useful as a measure, there are years (and decades) of publicly available results from thousands of professional managers... and we can get an idea of what's a reasonable result over time.

It's like having some guy come up to you at the golf course, and tell you he shot under 65 every time he played the last two months. Do I think he will one day beat Phil/Tiger and win the Masters? Without calling him a liar, I'd say a) it depends on the course he played at, b) can he keep it up, and c) it's awfully interesting the guys shooting -10 under are always carrying their own bag and keeping their own score, away from the glare of television cameras.

heech · Apr 20, 2012

Quote from heech:

It's like having some guy come up to you at the golf course, and tell you he shot under 65 every time he played the last two months. Do I think he will one day beat Phil/Tiger and win the Masters? Without calling him a liar, I'd say a) it depends on the course he played at, b) can he keep it up, and c) it's awfully interesting the guys shooting -10 under are always carrying their own bag and keeping their own score, away from the glare of television cameras.

Oh, and I should add... if he does manage to shoot 65 or less every time he plays Pebble Beach, then he should get ready to be a super star. Nike sponsorship, million dollar paydays, women parachuting down from the skies... name it, it's all yours.

Same is true if you can maintain a (meaningful) Sharpe over 4 consistently over time. You will quickly become, by far, the richest person you know. Just don't forget us when Institutional Investor magazine puts you on the cover.

macintash · Apr 20, 2012

Quote from heech:

Oh, and I should add... if he does manage to shoot 65 or less every time he plays Pebble Beach, then he should get ready to be a super star. Nike sponsorship, million dollar paydays, women parachuting down from the skies... name it, it's all yours.

Same is true if you can maintain a (meaningfull) Sharpe over 4 consistently over time. You will quickly become, by far, the richest person you know. Just don't forget us when Institutional Investor magazine puts you on the cover.

I don't plan in becoming the richest person, and I have no intrest in "Nike sponsorship, million dollar paydays, women parachuting down from the skies..."
Your all or nothing approach seems naive. IMHO even if you have a (meaningfull) sharpe of over 4 does not mean you will be the next warren buffett, (there might be issues with scalability once you reach over 20M etc.), what it means that you will propably make some decent money with some low risk, that's sounds good to me.