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I don't know anything about
"Mulvaney," but it seems that the essence of his comments which you quoted
is an effort to discredit the use of the standard deviation to measure risk.. Not
including the inherent risk of outliers, whether a trading system was designed
to capture those trades or not, introduces skewing. The Sortino ratio does
just that--it assumes that only downside risk is
important.
Given that a trading system
is intended to short-sell (as well), then it's necessary to consider all price
risk. I'm open to any suggestions
that might be a better performance benchmark, but so far measuring returns on a
risk-adjusted basis is unequivocally the consensus.
Colin
West
You will absolutely not have a high sharpe ratio if
you have a
long-term trend following system in either
equities or futures.
Trend
followers have made many statements as to why
low sharpe ratios exist in
funds that average 20-100%
returns in any given year due to outlying
trades.
The low Sharpe Ratio is due to the outlying winners,
and their
effect on the Sharpe Ratio calculation. This
quote, taken from
trendfollowing.com, discusses the
negative side of using a Sharpe Ratio to
calculate
risk versus return-
( Mulvaney also notes that conventional
measures of
risk-adjusted returns (i.e. Sharpe ratio) miss
the
boat:
"Implicitly using the standard deviation assumes that
the
returns are normally distributed. But in
fact our returns stream is very
positively skewed, and
highly asymmetrical. Our standard
deviation is
extremely high but this is because of the
positive outliers. The standard
deviation
involves squaring the deviations from the mean and
the
outliers are what really push it up. So a
very strong case can be
made that CTAs' performance is
severely penalized by the Sharpe
ratio." )
-Eric
--- sebastiandanconia
<sebastiandanconia@xxxxxxxxx>
wrote:
> "...fwiw, very few
mutual funds exceed 1.0 MSR :).
> Very good hedge
> managers obtain
2.0+ MSR...
>
> Interesting! Thanks, Colin.
>
>
> S.
>
>
> --- In amibroker@xxxxxxxxxxxxxxx,
"cwest"
> <cwest@xxxx> wrote:
> >
> > My favorite
subject/issue--performance
> measurement. The most
>
preferred
> > benchmark by which investment and/or trading
>
results are measured
> is the
> > Sharpe ratio. However, imo
there's a valid
> modification one should
> make to
> >
this measure. The Sharpe ratio assumes the
> risk-free rate is the
> interest
> > rate of 90 day Government paper. That's
>
unreasonable as there are
> plenty of
> > alternatives that
aren't classified as junk
> paper--270 day BBB+
> Corporate
>
> notes, for example. Even GM short-term paper is
> still pretty much
> risk-free!
> >
> > Therefore, a modified
Sharpe ratio (MSR) would be:
> annualized daily
> average
>
> return less the Corporate short-term interest
> rate, divided by the
> standard
> > deviation of the annualized daily average
return,
> is 'my' benchmark
> for
> > investment and/or
trading. When calculations are
> annualized short-
> term or
>
> long-term isn't too relevant.
> >
> > If your
trading systems can't exceed 1.5 MSR--the
> higher the number
>
the
> > better the performance--it's back to the drawing
> board.
fwiw, very
> few
> > mutual funds exceed 1.0 MSR :). Very good
hedge
> managers obtain
> 2.0+ MSR.
> >
>
> Colin West
> >
> > _____
> >
> > From: amibroker@xxxxxxxxxxxxxxx
>
[mailto:amibroker@xxxxxxxxxxxxxxx]
> On Behalf
> > Of Erik
Skyba
> > Sent: Tuesday, December 13, 2005 4:52 PM
> > To:
amibroker@xxxxxxxxxxxxxxx
> > Subject: Re: [amibroker] What metrics do
you use
> for comparing
> systems ?
> >
> >
> > upi is the most important personally, some metric
> that
measures
> > semi-standard deviation.
> >
> > -----
Original Message -----
> > From: "eric paradis"
<thechemistrybetweenus@xxxx>
> > To:
<amibroker@xxxxxxxxxxxxxxx>
> > Sent: Tuesday, December 13, 2005
4:06 PM
> > Subject: Re: [amibroker] What metrics do you use
>
for comparing
> systems ?
> >
> >
> > >
drawdown, annual return, time from drawdown to
> new
> > >
high, # of trades, win/loss %, avg winner , avg
> loser.
> > >
Should be enough there to come up with a good
> idea
> > >
about what is a good system.
> > >
> > > Eric
>
> >
> > > --- Condottiere <manset01@xxxx> wrote:
>
> >
> > > > Hi,
> > > >
> > >
> I am relatively new to trading and I've been
> going
> >
> > through a variety of
> > > > sources about system
comparison and robustness
> (i.e
> > > > Kaufman and so
on).
> > > > However, I'd be really interested in what
>
serious
> > > > traders find useful in
> > > > the
real world.
> > > > For instance, do you use standard metrics
or
> custom
> > > > metrics ?
> > >
>
> > > > Manu thanks for your thoughts and your
>
guidance.
> > > >
> > > >
> > >
>
> > > >
> > > >
> > >
>
> > >
> >
>
______________________________________________________________________
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> > > >
> > > >
> >
>
> > >
> > >
>
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