From what I gather, a large percentage gain relative to the norm, could hurt your Sharpe ratio as much as a large draw down, because Sharpe does not distinguish plus from minus. So what is the use? It gives you a false sense of security. Just ask Madoffâs investors.
True, so you can use Sortino as an alternative if you'd prefer. But from everything I've seen, Sharpe and Sortino are closely correlated with enough trading history. That is, no reason to think there are a lot of strategies out there with a positive skew.... trend followers tend to argue otherwise.
It's not impossible but it is interesting. OPM carries a lot of other baggage with it, it's not nearly as easy as just opening a brokerage account. Then there are the borderline personalities who rather not work in a social setting. That's where the Sortino ratio comes in.
I'm not necessarily trying to impress potential investors here & I have no intention to go into more specifics here on ET , but I'm pretty excited on my preformance so far this year, not so much the sharpe ratio, but the max DD of less then 2% P to V. Its not easy & I knew that when I made the goal for the year, and I keep updating the journal how I'm doing relating to my targets (see the first pages). So far YTD I have met my goals, should I be able to finish the year with similar results it would be a major acomplishment for me.
Then perhaps you shouldnt begin an argument you are not willing or capable of finishing. Obvious? Hardly. Once you've reached a certain level, there are more important things in life than maximizing PNL any further. Once you take in outside money you become an employee, to many that's not quite the obvious choice.
Perhaps it's all just a coincidence, then, that trading superstars all seem to fear public scrutiny and "becoming an employee".
So far there have been 2 types of comments here. Some argue that high Sharpe dosent mean a thing, others OTOH say high Sharpe is immpossibe (some actually argue both). IMHO high sharpe is possibe but dificult, and high sharpe means a lot especially if it is combined with low DD & high return. I'm glad "rallymode" was ready to share his expiriance here & I would encourage other high sharpes to share their results with us.
No, if you read carefully, the two criticisms can be easily merged: - Sharpe is a very flawed measure of skill (or attractiveness of investment) for some strategies, - for those strategies in which Sharpe is even useful as a measure, there are years (and decades) of publicly available results from thousands of professional managers... and we can get an idea of what's a reasonable result over time. It's like having some guy come up to you at the golf course, and tell you he shot under 65 every time he played the last two months. Do I think he will one day beat Phil/Tiger and win the Masters? Without calling him a liar, I'd say a) it depends on the course he played at, b) can he keep it up, and c) it's awfully interesting the guys shooting -10 under are always carrying their own bag and keeping their own score, away from the glare of television cameras.
Oh, and I should add... if he does manage to shoot 65 or less every time he plays Pebble Beach, then he should get ready to be a super star. Nike sponsorship, million dollar paydays, women parachuting down from the skies... name it, it's all yours. Same is true if you can maintain a (meaningful) Sharpe over 4 consistently over time. You will quickly become, by far, the richest person you know. Just don't forget us when Institutional Investor magazine puts you on the cover.
I don't plan in becoming the richest person, and I have no intrest in "Nike sponsorship, million dollar paydays, women parachuting down from the skies..." Your all or nothing approach seems naive. IMHO even if you have a (meaningfull) sharpe of over 4 does not mean you will be the next warren buffett, (there might be issues with scalability once you reach over 20M etc.), what it means that you will propably make some decent money with some low risk, that's sounds good to me.