Comments on: Where Have all the Sharpe Ratios (over 1) Gone?

By: salvadorveiga

salvadorveiga — Sun, 16 May 2010 22:38:42 +0000

it's easy to have those kind of returns when you just pump and dump based on their own alert subscribing newsletter…

By: salvadorveiga

salvadorveiga — Sun, 16 May 2010 17:38:42 +0000

it's easy to have those kind of returns when you just pump and dump based on their own alert subscribing newsletter…

By: TheRTTrader

TheRTTrader — Mon, 04 Jan 2010 23:12:58 +0000

What are the risk free rates of return used to compute the Sharpe Ratios over these time periods? A pet peeve of mine is the fund tracking sites use a constant, in many cases ca. 5%, even in 2009 when it was 0.2% or less. IMO, We have to live with market conditions, so should the those tracking performance. Another point, compare Sharpe or any other measurement on AUM size, the larger the AUM, typically, but not always, the lower the ratios. Just can't move around as easily with bigger size. Lastly, I think Paul Tudor Jones put the whole issue point on when he suggested that a truly good trader produces annual returns twice his draw downs. That I think is the real perspective for an investor to measure not only reward/risk, but also knowing if the risk profile fits his own.

TheRTTrader (Twitter)

By: EricC

EricC — Mon, 07 Dec 2009 21:00:22 +0000

Well said, excellent points. Personally, I think the Sharpe Ratio was designed in good faith but has since been “gamed” by asset raisers who artificially depress the denominator with creative accounting and/or substitution of infrequent catastrophic risk for normal volatility. Your point about the hedge fund indices is absolutely correct. With respect to backtesting, optimizing for Sharpe ratios almost always yields sub optimal terminal wealth and (terminal wealth / max drawdown). In other words, you pay a premium, in the form of opportunity cost, for a high Sharpe ratio.

By: Some Guy

Some Guy — Mon, 07 Dec 2009 19:45:59 +0000

I know of one HF that went from +100% in 2007 and accepting an award in January 2008, to a -100% and “out of business” by spring of 2008.

By: Some Guy

Some Guy — Mon, 07 Dec 2009 19:42:58 +0000

I don’t disagree with you that (1) WEB is one of the richest men in the world, (2) his track record is “widely accepted” as superior, (3) his CAGR is below 20 and Sharpe below 0.5, and (4) many feel that sustained higher ranges of compounding are possible.

I do think that mentioning (1) through (3) in one sentence is misleading, because it might draw someone to the false conclusion that one who is NOT rich now can get “ultra-rich” with his kind of track record. Buffett started rich and politically connected, and built his wealth the way MOST of the wealthy build it – through building BUSINESSES.

On what level of gain through market speculation is achievable long-term, check out the CS/Tremont Hedge Fund index when you get a chance. The granddaddy of categories, “Global Macro,” compounds at under 20% long-term. Studies suggest that HF indices have systematic errors that overstate their actual returns. I’m inclined to state that mid-20s to low-30s is probably the 99th percentile of sustained CAGR you’ll see from anything that is both survivable and scalable.

On Sharpe ratios, ignore them. They’re worth than worthless. Examples follow.

The CBOE PutWrite index, based on a totally mechanical strategy, has a Sharpe at RF=5% of 0.53, INCLUDING both October 1987 and October 2008. Going from November 1987 through September 2008, it has a Sharpe of 0.81. Is that Sharpe of 0.53 “good?”, seeing as how it came from an idiot play?

The CBOE PW has a better Sharpe at Buffett, who compounded (arguably! VERY arguably) his investments “near” 20%. The 23 1/3-year compounding of the CBOE PW is 10.3%.

Similarly, I have found in backtesting that the highest compounding for my systems is very often at Sharpes that are sub-optimal compared to what system parameters suggest. This seems to “disprove” what some mathematicians and HF managers seem to have “proved” about the Sharpe, but their “proofs” are really just a function of their flawed assumptions about the statistical properties of their return streams.

By: the99th

the99th — Mon, 07 Dec 2009 04:38:08 +0000

If you look at early performances of “famous” (industry-wide) hedge funds, they tended to do high double or triple digits their first year or two and then settled back to the low double digits.

By: macclary

macclary — Mon, 07 Dec 2009 04:16:35 +0000

I recall Buffett has stated that he views it as possible to compound at 100% per year with small scale assets.

By: EricC

EricC — Sun, 06 Dec 2009 22:21:16 +0000

Your points are interesting, and notice that I'm not disagreeing with you. But the topic is sustainable Sharpe ratios and annual rates of return. I simply pointed out that the richest man in the world happens to be an asset manager with a track record that is widely accepted as being superior to most. His CAGR has been below 20% and his Sharpe ratio has been below 0.5. These numbers are much lower than what many market participants believe is realistic.

By: Some Guy

Some Guy — Sun, 06 Dec 2009 22:02:48 +0000

Going from the top 1% of wealth, to the top 0.001% of wealth, isn't nearly as impressive to me as going from the median to the top 10%. But maybe that's just me?

My second point – that WEB got that way in a way you didn't describe – is just as important. I think next time Forbes comes out with their “World's Richest” list, you should do a research project on the members of it. Last time I went through the top 20 or so was a couple of years back, but there were three overriding themes in the list.

1 – born privileged,
2 – political connections, and
3 – building businesses.

WEB's “stock-market investing” expertise, which IMO has never been properly quantified on an apples-to-apples basis, probably mattered very little in his accumulation of wealth. Maybe if someone does the study on a proper basis, we'll see what that compounding really is.

Mebane, interested in that idea? Sounds vaguely similar to “alpha clone” doesn't it?