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

Let me see whether I can bring some Kelly logic to this discussion.

Your goal is to make most money in the long run, subject to your risk tolerance. I typically have a running sharpe of about 3 over 3m, 6m, 1y interval and daily standard deviation of 1%. If running sharpe drops too low, I personally cannot handle it and subconsciously started to reduce risk/positions.

Remember according to kelly rule, your optimal position for continuous distribution is:

mean/var

which is same as

sharpe/std

So if you annualized sharpe is 3, which implies a daily sharpe of 0.2, you can choose to increase or decrease size/positioning based on your daily standard deviation and your risk tolerance / risk aversion.

Say if your daily standard deviation is about 2%, and your daily sharpe is 0.2, then you optimal kelly position is 0.2 / 2% = 10, which means you should size up 10 times more according to Kelly rule, which assumes a risk aversion of 1 (log utility or long run acct growth maximization). If your risk aversion is 10, then you are exactly doing the right positioning.

Furthermore, if you do lots of long-short, which is BP intensive, you might not be able to increase your positioning due to margin constraint. I typically take 5% or 10% of optimal kelly position.

njrookie

 

Am I not making sense or this sounds too complex?

 

Yes, sounds too complex. Can you explain more?

 

Sure, sell the ATM straddle, magic!

 

Yes, makes sense, but you really have to have your trading down to a science regarding the probability of your trades and be able to gauge the reward/risk to be able to implement a money management system like that.

 

So are you saying its easy?

 

Sure, as Sharpe is flawed and of limited utility.

 

You have to limit your max losses, on top of having a reasonable sharpe.

 

I beg to differ. Retail trading is much easier than institutional trading, in regards to size. Leverage and liquidity are infinitely available for the retail trader. Not so for big institutions, even with large swaps.

Coming up with an edge with a sharpe above 2 is not out of the question for retail trading. Personally one should be aiming for this, imo. Of course, below 2 is fine. Good HFT firms have astounding sharpe ratios, and even more astounding profit factors - profit factors way beoynd 10 and nearly undefined sharpe ratios.

Sharpe is also almost pointless for great systems, because it will decrease with exponential equity curves. Sharpe basically means consistency and profitability, which can be inferred from the equity curve alone.

Lastly, your hedge fund index is largely made up of loser small firms that are not much different than the freak shows at bank branches around the country. Along with the disadvantages of actively trading large funds and lack of investment bank resources medium and small firms have, you get allot of dork firms added to the "hedge fund average".



I don't intend to be another unpleasant anonymous male trader trash talker, but while you have great insight on the board and I most appreciate it, it really is annoying to listen to someone proclaiming perfect knowledge when it is starkly obvious who is a boy and who is a man around here. It's especially annoying to listen to stubborn laggards who are probably older than me. Talk about problems. This is more of a general statement, and definitely not directed at you, so don't feel provoked..........................

 

Someone with a sustained Sharpe of 4+ is either cheating (let's just file some of the HFTs into this category, OK?) or hasn't been trading that long. I've seen ~ a 3.5 for one of my systems over the course of a particular year but it is under 2 over 5+ years across all systems.

Given that you are not a HFT or operating in an illegal way, if your leverage assumes anything beyond a Sharpe of 1 going forward, then you are going to really be learning some hard lessons in the future.

The problem isn't that some of us have supreme knowledge of what is possible, the problem is a huge number of the people on here are leading people to believe that what is extremely unlikely is actually some sort of benchmark.

What is a "reasonable" benchmark for small traders? Probably somewhere in the 50%-80% a year un-leveraged return, and a Sharpe of 1.5. Anyone consistently producing those sorts of results should be quite happy and if you want more return and risk then just lever up.

All of that said I agree with many here that Sharpe is flawed, but it is a common performance metric in this field so it is what it is I suppose.