Fewer than 5% of top-tier bank traders have Sharpe ratios > 3

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pinetboltz

by way of efc, fewer than 5% of top-tier bank traders have Sharpe ratios above 3:
https://news.efinancialcareers.com/jp-en/312321/get-trading-job-bluecrest-capital-management-now

specifically,
"Some traders cast aspersions on BlueCrest's alleged new choosiness. "A sharpe ratio of two is good, but not incredible," says one. "Admittedly most guys in a bank are on 0-1.5, but the real outliers are on 3+." Fewer than 5% of top traders at banks like Goldman Sachs and J.P. Morgan are thought to hit sharpe ratios of three and above, he added."

on job ads for stat arb guys, the sharpe requirement is usually around 2, eg:
https://www.efinancialcareers.nl/jo...folio_Manager.id04361262?page=8&backLpId=s015

a few points/ questions:
- supposedly the market's Sharpe is around 0.5 (https://www.capitalspectator.com/are-recent-sp-500-returns-excessive-part-iii/)
- warren buffett's Sharpe has been estimated at 0.76 (http://docs.lhpedersen.com/BuffettsAlpha.pdf)

- when the traders maintain Sharpe >2 or 3 over an extended period of time, are they mostly running quant strategies? you hear of hfts with sharpe >3, wondering if the other strategies with similar risk-adjusted returns are low-frequency quant strategies, and to what extent discretionary strategies can achieve a high Sharpe (supposedly Michael Platt of Bluecrest never had a drawdown above 3%, go figure)

- what would be the unlevered annual return profiles of guys with Sharpe of 2-3? are we talking about 8-10% on an unlevered basis, if that, because there's no shortage of reports of how hedge funds are making quite subpar returns for a lot of investors, despite bank traders always making the move to hedge funds

- when the bank traders generate profits while keeping their Sharpe high, is their edge coming from sources other than superior analysis? bc why do you hear of bank traders losing on their personal accts, or having subpar returns after making the move to the buyside? what is it exactly that helps them generate the high risk-adjusted returns when they trade for the banks, if not superior analysis?

- for bank traders who are seen as top of their class, are they making $$$ with high Sharpes by virtue of their positions on the bank's trading desk, which gives them private insight on order flow from their clients ahead of time, and the stop levels, etc, instead of pure analysis per se of widely available info? what else? if just the former, surely they wouldn't be seen as all that 'valuable' for hedge funds, because who would pay top dollar to hire someone who by definition would lose their previous edge when they come to you?
 
Another aspect of this is longevity -- i.e., for how long has Trader Z performed with a Sharpe of >3.0?? Traders who only trade one (type/season/climate) of market think every market must be just like the one that they traded. If they made out, then "Trading is easy!" and all who fail are idiots. If they went bust, then "Trading is *impossible*!" and all who attempt it are phools.

"If the fool would persist, they would be wise." (A saying that well-precedes Einstein...)

At any rate, a *really* talented trader is one who can trade well, sense early when ways/means/methods need adjustment (or wholesale expulsion!), and adapt successfully to multiple new market regimes. *That* is someone to be sought.
 
Is Sharpe Ratio concerned with evaluating the performance of a given portfolio, or does it include the behavior of the manager??

I once ran a mutual fund market timing service. (Big fish in a little pond... $60MM AUM.) Seemed to me that the notion of Sharpe didn't apply to my style. (??)

Back in the late '90s, I had my hottest streak. 5 years of averaging 75% compounded return... zero losing quarters... largest drawdown, daily-close-to-daily-close = -1.4%. (I know, how can that be? Sounds incredible. Well, it be.) What kind of Sharp Ratio would that be, or does it even apply??

People have asked me, "What's your Sharpe Ratio"? (Like, they would like to know my Sharpe before considering my worth to have me manage their money.) I've always said, "I have no idea." Wouldn't even know how to calculate it.
 
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tommcginnis said:
Another aspect of this is longevity -- i.e., for how long has Trader Z performed with a Sharpe of >3.0?? Traders who only trade one (type/season/climate) of market think every market must be just like the one that they traded. If they made out, then "Trading is easy!" and all who fail are idiots. If they went bust, then "Trading is *impossible*!" and all who attempt it are phools.

"If the fool would persist, they would be wise." (A saying that well-precedes Einstein...)

At any rate, a *really* talented trader is one who can trade well, sense early when ways/means/methods need adjustment (or wholesale expulsion!), and adapt successfully to multiple new market regimes. *That* is someone to be sought.
More...

agree, the LCTM guys prob had really high Sharpes too (ok just checked, they had like a 4+ sharpe)

at what point does Sharpe not become that important? maybe it's like a laffer curve, where too high Sharpe ratios indicate low capacity/brittleness of strategy, etc rather than true awesomeness

still, am curious about what's so special about bank traders' analysis/trading techniques while they're in their sell-side positions that can't be replicated easily when they move to hedge funds -- i mean, if you look at the job postings for bank traders at the top banks, the descriptions seem quite mundane:

eg. for jp morgan
position as fixed income derivatives trader in new york,
https://jobs.jpmorganchase.com/Show...-Derivatives-Trader-Associate-Vice-President/
Responsibilities include
" Execute daily...for the portfolio management team
- Understanding of liquidity provision and interactions with the dealer community
- Articulate and provide market and pricing color and trends to portfolio managers / research analysts / traders
- " Analyze “cheap” versus “rich” derivative relative value opportunities in relation to liquidity, curve and spread scenarios based on prevailing and projected market environment
- Manage compliance and regulatory requirements for trade executions and allocations
etc"

position as commodities derivatives trader in london:
https://jobs.jpmorganchase.com/ShowJob/Id/131688/CIB-Global-Commodities-Derivatives-Trader-–-Executive-Director/
"
Key responsibilities:
- Pricing and managing derivative risk.
- Have a strong fundamental and statistical understanding of the Energy Markets.
- Working closely with the Sales organization to generate trade ideas/concepts.
...

Essential skills:
- Excellent Excel knowledge.
- Excellent time management skills.
- Options risk management.
- Interest in markets, and macro trends.
..."

sure, it's a clearly defined role for a professional, but the daily responsibilities/ skill requirements don't exactly seem insanely spectacular or anything, and so what would be the mechanism that bridges the gap from regular finance guy on the trading desk job on the 1 hand, and the very high Sharpe trading profits that is churned out by the desks on the other hand
 
pinetboltz said:
the LCTM guys prob had really high Sharpes too (ok just checked, they had like a 4+ sharpe)
More...

From what I read, they were playing a strategy which included 100:1 leverage? What? Are you nuts? With the vagaries of the markets, how can anyone with half-a-brain even imagine "all losses will be contained within a 1% drawdown"?
 
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Scataphagos said:
Is Sharpe Ratio concerned with evaluating the performance of a given portfolio, or does it include the behavior of the manager??
More...

it analyzes the stream of returns produced on a portfolio, so i guess it implicitly includes the behavior of the manager to the extent that he builds and implements the strategy


Scataphagos said:
Back in the late '90s, I had my hottest streak. 5 years of averaging 75% compounded return... zero losing quarters... largest drawdown, daily-close-to-daily-close = -1.4%. (I know, how can that be? Sounds incredible. Well, it be.) What kind of Sharp Ratio would that be, or does it even apply??

People have asked me, "What's your Sharpe Ratio"? (Like, they would like to know my Sharpe before considering my worth and having me manage their money.) I've always said, "I have no idea."
More...

nowadays you have so many choices of software that runs the calculations for you, but if you want the formula: https://www.investopedia.com/terms/s/sharperatio.asp
 
pinetboltz said:
agree, the LCTM guys prob had really high Sharpes too (ok just checked, they had like a 4+ sharpe)

at what point does Sharpe not become that important? maybe it's like a laffer curve, where too high Sharpe ratios indicate low capacity/brittleness of strategy, etc rather than true awesomeness

still, am curious about what's so special about bank traders' analysis/trading techniques while they're in their sell-side positions that can't be replicated easily when they move to hedge funds -- i mean, if you look at the job postings for bank traders at the top banks, the descriptions seem quite mundane:

eg. for jp morgan
position as fixed income derivatives trader in new york,
https://jobs.jpmorganchase.com/Show...-Derivatives-Trader-Associate-Vice-President/
Responsibilities include
" Execute daily...for the portfolio management team
- Understanding of liquidity provision and interactions with the dealer community
- Articulate and provide market and pricing color and trends to portfolio managers / research analysts / traders
- " Analyze “cheap” versus “rich” derivative relative value opportunities in relation to liquidity, curve and spread scenarios based on prevailing and projected market environment
- Manage compliance and regulatory requirements for trade executions and allocations
etc"

position as commodities derivatives trader in london:
https://jobs.jpmorganchase.com/ShowJob/Id/131688/CIB-Global-Commodities-Derivatives-Trader-–-Executive-Director/
"
Key responsibilities:
- Pricing and managing derivative risk.
- Have a strong fundamental and statistical understanding of the Energy Markets.
- Working closely with the Sales organization to generate trade ideas/concepts.
...

Essential skills:
- Excellent Excel knowledge.
- Excellent time management skills.
- Options risk management.
- Interest in markets, and macro trends.
..."

sure, it's a clearly defined role for a professional, but the daily responsibilities/ skill requirements don't exactly seem insanely spectacular or anything, and so what would be the mechanism that bridges the gap from regular finance guy on the trading desk job on the 1 hand, and the very high Sharpe trading profits that is churned out by the desks on the other hand
More...

The two roles you listed above are more for "execution trader" and/or "sales trader."

Prop trader requirements are significantly much higher. The bar is usually MS/PhD in a pretty quantitative discipline from a top 10 schools with strong programming, math, stats, etc.

Those are the traders who are even tracked with Sharpe rations and they are the ones making the moves to the buy-side (hedge funds).

Albeit not all prop traders need to be superquantitative(though nowadays most are). Some are more macro traders that risk firm capital. They move to macro hedge funds. There are other variations too.

Nowadays they are not called prop traders due to regulation since GFC. All prop trading desks have been shut down. Though banks still do some prop trading, it's just not called prop trading anymore. haha
 
trader99 said:
The two roles you listed above are more for "execution trader" and/or "sales trader."
...
Nowadays they are not called prop traders due to regulation since GFC. All prop trading desks have been shut down. Though banks still do some prop trading, it's just not called prop trading anymore. haha
More...

good point, some of the funds hiring ex-bank prop traders have mostly been recruiting from the more senior guys who were already prop trading before the volcker rule

with prop trading becoming increasingly rare in banks, what would be the best route to getting a role that allows for building of a portable, institutional-quality track record that allows for a move to a top hedge fund, such as bluecrest, balyasny, millennium, etc?

without the benefit of a track record, fresh grads seem to mostly join the smaller prop shops (not necessarily a hedge fund, where the capital base/allocations are much higher), or places where there's a team-based portfolio instead of having their own trading books (& the avenues to eventually getting an allocation can be quite some time down the road or dependent on the whims of higher-ups, if at all possible)
 
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