sharpe ratios

Discussion in 'Trading' started by mind, Dec 10, 2003.

  1. mind


    do you kow your sharpe ratio? i find it rarely mentioned on this board, yet to me it is a quite important figure.

  2. Please explain why you believe the Sharpe Ratio is important????
  3. EricP


    I think sharpe ratios can be very important, as well, to judge the risk adjusted return of a system. One thing that I've always wondered is what is the most common way to use a sharpe ratio:

    1) Looking at the sharpe ratios of all trades
    2) Looking at the sharpe ratio of daily returns
    3) Looking at the sharpe ratio of weekly returns
    4) Looking at the sharpe ratio of monthly returns

    For hedge funds with somewhat long track records, I think #4 is most common. But, how do most traders use the Sharpe Ratio? (For me, I use it most commonly on a trade-by-trade basis)

  4. mind


    to make it short: i do not want to enter a discussion about the most widely spread single figure among the professional alternative investment scene. i am aware of the ifs and whens, the improvements here and there. i think it is important to combine return and risk in one figure. for me sharpe is a quite good concept to do so. (sorry if i am doing you wrong, but i had conversations about the value of SR before - and this thread was not started out of the intention to have another one ...).

    i think after forty or fifty observations (=about five years if you use monthly data) all annualised standard deviations will be more or less the same, thus the sharpe ratios will be the same, whether you calculate them on five years daily data or five years monthly data.
    having said that i remember another thread here that shed some light on the fact that you must go intraday to value a strategy, if the average holding period is just a few hours. i am still not sure about the argument ...

  5. mind



    looking at the trades does not seem useful to me, since the concept of time is lost ... is this the useless figure they use on TS?

  6. In answering my question you said,

    "i think it is important to combine return and risk in one figure. for me sharpe is a quite good concept to do so."

    Thanks for your response. I looked at your posts on THIS board and found none of your thoughts concerning the Sharpe Ratio.

    I was curious why you like the Sharpe Ratio. I agree that it is important to consider risk along with return, but no matter how widely accepted it is, I believe the Sharpe Ratio to be a very poor measure of risk. Using variance (standard deviation) does not measure risk except maybe on average or for the average manager.

    Good Luck
  7. mind


    fine with me. good luck to you.

  8. mind


    good trendfollowing ctas usually trade SR around 1.0-1.5.

    discretionary long short equity funds trade somehow above that, but this group is so inhomogene that averages do not make too much sense.

    systematic yet discretionary approaches like merger arb or convertible arb trade between 1.5 and 2.0, some outliers well above.

    quantitative stock trading did well during the nineties, but suffered since decimilisation. over ten years avg sharpe within this group was above 2.0.

    i have these numbers from hedge fund research and i suppose there are daytraders that do significantly better than the figures mentioned. curious to get ideas where they end.

  9. My SR over the last 36 months is 2.5. I trade stock indices and bonds systematically.
  10. mind


    pretty good figure. mind telling your trading frequency?

    #10     Dec 11, 2003