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Keep in mind LTCM had a lot of illiquid securities on the books. It is pretty easy to fudge your risk numberswith illiquid securities b/c the pricing of these securities may not only be subjective but can be kept "stale" as the manager sees fit. Thus, the manager can spread returns out over a number of periods instead of recognizing the entire return in one month. Let's say the fund has an annualized return of 15% and a 4% SD (a damned good shapre ratio), with such a low SD you'd expect an average monthly return of say 1.3%. If the portfolio isn't marked to market frequently of if the manager has discretion in the timing and pricing of securities how do you know if the monthly returns are accurate? Maybe some of your illiquid bonds had a big mark-up for the month causing the portfolio to rise 5%. Well....that is going to screw up your nice volatility numbers so to make a smooth transition you'll recognize a portion of that gain
and then recognize the remaining portion in the next month or (even better!!) save it for when you have a down month .....which will then turn a down month into a positive month! Just like magic. I'm not saying LTCM did this but it is something to look for and something that is very difficult to detect.
eric paradis <thechemistrybetweenus@xxxxxxxxx> wrote:
Well, the irony here is not that I would trust long
term capital, but that I would trust their Sharpe
Ratio, LTCM reportedly had a Sharpe ratio of 4.35
(after fees).
--- areehoi <rhoierman@xxxxxxxxxxxxx> wrote:
> Eric,
> If you trust the Hedge Fund mangers you need to read
> the book about
> downfall of Long Term Capital the biggest hedge fund
> in the past
> decade. It all but brought
down the entire financial
> markets. See:
> www.erisk.com/Learning/CaseStudies/ref_case_ltcm.asp
>
> R.E. (Dick) Hoierman
> --- In amibroker@xxxxxxxxxxxxxxx, eric paradis
> <thechemistrybetweenus@xxxx> wrote:
> >
> > 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@xxxx> 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
>
=== message truncated ===
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