Sharpe Ratios

Below is an excerpt from a fantastic blog called Falkenblog:

“I once interviewed with a hedge fund, and they said they only take strategies with Sharpe ratios above 2. I’ve worked at a couple hedge funds, I never saw one with a Sharpe above 2 that didn’t have access to retail flow. As the average fund had a Sharpe below 1, and these generally were diversified pools of several strategies, the Sharpe>2 criteria merely ensured you were either getting frauds or fools. They had over $5B under management at one time, now a couple hundred million. If investors merely talked to these guys, they should have known better.”

Scanning the JOBS section on Bloomberg there is almost a daily posting from seemingly the same shop searching for high-frequency/quant traders with a track record of X years and Y AUM and Sharpe of 3+…..3+ Sharpe? Are they kidding? These postings are more then likely written by headhunters or those without a serious understanding of systematic trading.

I’m not saying that these strategies don’t exist, I just question the long term viability or scalability of these strategies. An Ultra High Frequency Trader can put up high Sharpes’ but can it be scaled to $50MM, $100MM+ ? At that scale it’s likely the action of the trader will change the time series making the backtest suspect. Let’s say your strategy can do both? Then what are you doing on Bloomberg JOBS, give me a ring!

Now what if you split a large pie amongst numerous Sharpe 3+ strategies…..

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~ by largecaptrader on June 16, 2009.

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