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Bob Fulkes writes of Sharpe ratios of mechanical systems.
Why not disuss the Sharpe ratios of CTA funds such as
John Henry's, David Druz's, and so forth? They are
100% mechanical, they have a proven track record
(audited, to boot), they have actually made money for
clients as well as themselves.
It is reasonable to expect that the very best Sharpe
ratios are produced by the very best CTA funds -- they
have the most experience, the most market-battle-tested
savvy, and (very importantly) the largest research
budgets to investigate the widest possible spectrum
of trading system ideas.
Go ahead and look. You'll find that CTA's, even the
best of the best, the ones who test out EVERYTHING,
have a Sharpe ratio less than 1.0.
There are plenty of CTA's reading this list and
indeed reading this very message. These CTA's are
tracked by a variety of Managed Futures advisory
services, some in traditional ink-and-paper print
media, some on the web, some doing both. I will
guarantee you that none of these CTAs will respond
with a message, "Go look at such-and-such website
containing my audited results, you will see that
I achieved a Sharpe ratio greater than 3 for five
straight years." No way, Jose.
Mark Brown is a CTA, he advises a managed futures
fund. Go look up his Sharpe Ratio to see what is
actually possible in the real world. See if he
routinely achieves 3 or greater. (answer: no).
See if he even hits a Sharpe Ratio of 1 (answer: no).
This doesn't necessarily mean Mark Brown
is a poor trader, it means that (sharpe ratio > 1)
is a poorly chosen threshold-of-acceptability for
the real world we actually live and trade in.
Get used to it: what can actually be realized
using actual trades and actual fills and actual
markets, is a Sharpe ratio slightly less than 1.
Not 3, not 3-to-5, not greater-than-5. Less than 1.
That's the bad news. The good news is, you can
make >100% profits per year, even with a Sharpe
ratio less than 1. Larry Williams proved it.
Richard Dennis and the Turtles proved it. Michelle
Williams proved it. You and $395 worth of Pinnacle
Data, and $3000 worth of Trading Recipes software
can prove it too.
--
Mark Johnson Silicon Valley, California mark@xxxxxxxxxxxx
"... The world will little note, nor long remember, what we
say here..." -Abraham Lincoln, "The Gettysburg Address"
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