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At 10:45 PM -0700 9/19/00, Mark Johnson wrote:
>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.
<snip>
>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.
I do not disagree with Mark.
First, we are talking about slightly different things. I was talking
about the Sharpe Ratio of a system as backtested by applications such
as TradeStation. Real life performance is always poorer because of
missed trades, excess slippage, etc. Assuming you are not curve
fitting and make realistic assumptions, real results can come close
to the simulated results, however.
In another post yesterday, I showed that only 4% of the 8538 funds
with data on the MorningStar.com site had a Sharpe Ratio equal to or
greater than 1.0 and all 8538 remain in business.
I have not studied CTA funds but I have studied traditional money
managers, big and small, investing in stocks and mutual funds. Their
results typically have Sharpe Ratios well below 1.0 and they seem to
stay in business.
Mark and I both know of a gentleman that has consistently won his
local futures trading contest year after year by trading Aberration
on a basket of commodities using daily data. I have tested his
methods extensively using TradeStation and am pretty sure that the
Sharpe Ratio he realizes is under 1.0.
I am a member of an trade organization of money managers and have
been to their annual meetings and discussed with them the systems
they use. Most such systems are very crude compared with what is
discussed on these trading lists. Many of these managers would be
overjoyed to realize a Sharpe Ratio of 1.0, (assuming they even knew
what it was).
But there are money managers who have turned in real Sharpe Ratios
over 3.0 for most years. (One of them is managing money for me right
now.)
And the situation is massively different if you are managing tens of
millions to billions of dollars. If your system says "sell 100,000
shares of Microsoft stock", you do not just do that with the click of
a mouse. This is where the little guy can do a lot better than the big
guys and realize much better results than they can.
Long ago, I concluded that the commercial success of a money manager
or mutual fund has more to do with their marketing ability than with
their technical ability. Most customers only listen to the hype and
look at last year's returns in deciding where to place their money.
Once a hot new mutual fund manager makes the Money magazine's top-ten
list, you can be sure that he will be flooded with far more money
that he knows what to do with and his next-year performance will
suffer.
The clients of most funds and money managers do not understand the
importance of the variability of returns and have never heard of the
Sharpe Ratio. That is good for us since if we are going to do better
than average, we need others who are doing worse than average...
"It is wonderous that with so little wisdom, the world is ruled in
high places."
Bob Fulks
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