A wonderful
month! Up 25% with only the
tiniest of blips along the
way. This is the stuff
of dreams.
This month has been an
important one for me. I've
been now publishing these reports
come hell or high water for
two-and-a-half years now, and my
cumulative P/L has now broken
through the 1000% mark,
while keeping my Sharpe ratio
above 2 on uncompounded returns
(which is considered good), and
above 3 on a compounded basis
(which is considered even better).
Actually I have been recently
talking to a few Hedge Funds, and
in particular comparing my
personal trading in Futurestech
with the expectations of the funds
management industry in
general. I have to admit
that I have a few problems with
their most sacred of measures, the
Sharpe ratio, as a measure
of volatility/risk.
I'll try to explain why.
The table below summaries my
performance since I commenced
these reports:
As you will
see there is plenty of volatility
in the returns - however the vast
majority of returns are positive
months. This is the key
difference between the Sharpe
Ratio and what I'm beginning to
see as a more meaningful measure -
the Sortino Ratio. The
problem is that the Sharpe ratio
penalizes upside volatility, by
taking into account the volatility
of all returns, whereas the
Sortino Ratio only uses downside volatility
as the denominator (divisor) in
it's equation.
Now I agree
that in most cases any volatility
in returns is not ideal, and in a
perfect world we would all like to
see a perfectly smooth
upward-sloping equity curve,
however, the upside volatility in
my returns is directly
attributable to the way I position
size (see Trade
Size (VFP)) and it is this
money management method that has a
considerable bearing on my overall
performance, as well as the reason
I am able to sleep at night!
Based on the
above it seems to me to be quite
logical (and acceptable) to embrace
higher volatility on the upside,
providing it is well contained to
the downside.
Anyway, if
any of the professionals reading
this who would like to comment, I
would very much like to discuss
the issue with you. morleym@bigpond.com
