my sharpe just went from a 3.7 to 2.8 because of sept results... i'm having a horrible September. Still grinding hard to try to have a respectable September. first losing month in a long time
Sharpe ratio measures and penalizes realized vol which imo is a poor estimation of risk. We all know you can game the system by hiding risk at the tail end......
I would not call it "hiding" risk at the tail end. What is hidden? If a managing supervisor or risk officer has no clue how to monitor and supervise its traders and how to enforce risk limits is that the fault of anyone outside? No, the risk is perfectly well defined. Low tail risk -> low market value for such risk, regardless of whether long or short side. High tail risk -> fair market value payment for such higher risk. By the way, we should all realize that Sharpe ratio computations strictly deal with realized values. The definition deals with "realized profit/loss", so yes, of course realized return volatility has to be taken into account to properly reflect the returns in a matching context of risk. What is the point to adjust a past return for future volatility. The question that sharpe ratios answer is how worthy the return was in light of the given return variability at that point in time.