This may better explain what sharpe misses on tail risk. It may not apply to your situation if you have absolutely zero tail risk. http://www.ilukacg.com/articles/All Hail the Sharpe Ratio.pdf
The risk cannot be defined. We're not referring to cherry-picking samples. There was a guy on here selling some passive short vol crap (selling nickels) and he just picked the sample set he liked during the 2008-9 crash for his backtest. He simply ignored any month with any peak to valley larger than 50 in the SPX. He also applied his Sharpe/Sortino to the debit requirement on the spread, but some arbitrary (read bullshit) figure on his DD. IOW, he would calculate best-case on wins and some small % of account in spread on losses (he applied a 20% allocation of spreads to the portfolio to months he lost money. 100% on wins, but marked to 20% allocation on losses). So yes, anyone can find a historical period in recent memory where is was advantageous to be in a passive short-vol program. I am typically net short vol, short delta in my personal trading, but it's an active program. Edit: it was HowardCohodas
I hope this will be my last answer on this topic. Number 1 I do not sell premium, period.. Number 2, I agree that the fact that I currently have a high Sharpe ratio does not mean that things could not change and/or that the strategy would not suffer a big loss in the future. Therefore I have a 10% monthly stop loss rule (yes, its liquid and enforceable). Most of the months my max loss (not DD) does not reach 2%, so anything above 5% would mean I need to start preparing for an exit. Bottom line if I made 92% last year, and the strategy goes down the drain next week, I am still left with 73% profit. That's the way I try to manage my risk.
Well, last year people made similar risk/returns just being short vol and nobody was particularly impressed. I actually suspect that I know what you do, unfortunately this space is too capacity constrained for me to get involved. What's interesting to me, do you understand what risk premium are you selling and who is paying for your "free" lunch? Anyway, the point it that there are many ways of being short risk premium that do not involve selling options or being short VIX. Nobody is saying that this is necessarily bad if you understand and reflect on the risk.
I am done with this subject. I think I have explained well how I manage/plan to manage risk, letâs go back to Sharpe. Anyone with high Sharpe low DD ready to share their results here? (personally I Donât care if you are short premium, long premium, delta, Vega etc)
Really? This thread + conversation, again? Bottom line: Sharpe is meaningless without understanding the underlying strategy. No point in playing 20 questions in trying to figure out what you're trading, the bottom line is Sharpe is extremely limited in its utility. You can do apple/apple comparisons with it, but that's about it. I had a 3.7 Sharpe last year, and with a max daily DD of 3.4%. And I'm constantly explaining to investors why this isn't a bad thing.. and yes, that means being extremely, extremely open about my strategy + risk management. Sophisticated investors are automatically very weary about taking metrics like this at face value.
Good. Sharpe of 3.7 and max daily DD of 3.4% is very good, I like that. What do you expect for this year? Also how much was your % return for the past year? Anyone else care to share their high Sharpe here?
I'm pleased with my performance last year, and it certainly helped me tripled my AUM over the past 12 months. But dude, last thing I want to do is contribute to the idea that "sharing high Sharpe" for a single year is remotely meaningful or useful. I know I can tweak my Sharpe up/down very easily based on how I weigh my long gamma hedges vs my core portfolio.
My CC book posted a dollar Sharpe of 4.2 last year, with no down months but it had some seriously bad days. On the other hand, my tail hedging book was up about 10% of risk capital and the Sharpe was only 1.4. Guess which one attracted investors?