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Either way, I'll trust the opinion of hedge fund
managers with 30+ years experience who I'll assume
their records speaks for itself.
--- cwest <cwest@xxxxxxxxxxxx> wrote:
> In the context of back testing a trading system, I'd
> agree that profitable
> outliers will impair its merit when the results are
> measured on a risk
> adjusted basis. In other words, an ounce of good
> luck if you will becomes a
> paradox. When measuring results on a risk-adjusted
> basis it's probably a
> valid approach to exclude outliers provided that
> additional risk wasn't
> incurred to obtain the profit. Analogous to winning
> something from a lottery
> when the loss of the cost of a ticket isn't
> relevant. I don't think that's
> real-world in terms of designing and developing a
> trading system.
>
> _____
>
> From: amibroker@xxxxxxxxxxxxxxx
> [mailto:amibroker@xxxxxxxxxxxxxxx] On Behalf
> Of Fred
> Sent: Wednesday, December 14, 2005 5:19 PM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: [amibroker] Re: What metrics do you use for
> comparing systems ?
>
>
> Price ?! risk or Equity Curve risk ?
>
> The problem with Sharpe is that by it punishes
> upside "anomolies", if
> you can call them that on the equity curve. I'll
> take
> uncharacteristic upside movement in the equity curve
> every day.
>
> --- In amibroker@xxxxxxxxxxxxxxx, "cwest"
> <cwest@xxxx> wrote:
> >
> > 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
> >
> > _____
> >
> > From: amibroker@xxxxxxxxxxxxxxx
> [mailto:amibroker@xxxxxxxxxxxxxxx]
> On Behalf
> > Of eric paradis
> > Sent: Wednesday, December 14, 2005 2:19 PM
> > To: amibroker@xxxxxxxxxxxxxxx
> > Subject: Re: [amibroker] Re: What metrics do you
> use for comparing
> systems ?
> >
> >
> > 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@xxxx>
> > 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.
>
=== message truncated ===
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