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In the book (“The Man Who Solved the Markets”), the author actually provides the Sharpe ratios for their flagship fund (“Medallion”). Medallion’s Sharpe Ratio h
by cepth 7y ago
In the book (“The Man Who Solved the Markets”), the author actually provides the Sharpe ratios for their flagship fund (“Medallion”). Medallion’s Sharpe Ratio has almost never been below 2.0, and has been as high as 7.0 (!!!) in some years.
I’ll link to the Wikipedia page below for the math, but these figures would highly suggest that their returns are much less likely the result of luck, and more likely the result of some edge/alpha generation.
https://en.wikipedia.org/wiki/Sharpe_ratio https://en.wikipedia.org/wiki/Sharpe_ratio
- soVeryTired 7y agoWell I'm saying it's both skill and luck, combined with hindsight bias. They're famous because Medallion is the best performing quant fund. Even if quant funds were just chumps tossing coins, if you pick the best of a number of them, you'll get something that looks good. Now that maths still doesn't stack up that they were just lucky - they probably had skill too. But I think it's more likely that they had a modest edge and were lucky than it is that they had a large edge and got an average result.
- maest 7y agoThing is, with the amount of leverage they are running, it's more luck than skill. Luck means making big returns, skill means doing it with low volatility and high Sharpe.
- tomp 7y agoThe point of Sharpe is that it’s invariant with respect to leverage. Anything with sharpe 3+ is extremely impressive - that’s 3 sigma, assuming normal returns that’s like 2% tail event.
- rlucas 7y agoYes, but Sharpe calculated ex post is also subject to survivorship bias. For example, you might make a (successful) bet that works only in a low-volatility environment; if it works, your ex post Sharpe ratio will look ingenious.
- cepth 7y agoThe point about survivorship bias is a fair one. But, if a given fund (Medallion in this case) is able to thrive/survive during the 1998 Russian financial crisis (which felled LTCM), the 2000-2004 tech bubble bursting, the 2007 quant quake, the 2008 financial crisis, and 2010 flash crash, it would seem to suggest that their statistical arbitrage strategy performs well in all manner of environments. After their very hefty 5/40 fees, their worst year between 2001 and 2013 was a 21% gain [1]. I understand that there are all manner of epistemic and mathematical problems that prevent us ever from completely disentangling luck and skill, but a conceptual framework like "The Superinvestors of Graham and Doddsville" would seem to apply here. I.e., after a long period of consistent overperformance, the case for skill starts to look much more likely. [1] http://archive.is/JdQiw http://archive.is/JdQiw
- maest 7y agoSure, but volatility is not, hence the "low volatility" part of my comment.
- smabie 7y agoSharpe isn’t invariant with respect to leverage. Volatility drag implies that a leverage will always decrease your Sharpe, unless your volatility is 0.
- svd4anything 7y agoYou really don’t know what you are saying. The leverage is to boost absolute returns. Sharpe isn’t changed by leveraging. They are automated black box strategies making 1000s of trades a day with massive undeniable statistically significant information content.
- smabie 7y agoSharpe is actually changed by leverage due to volatility drag. Your Sharpe ratio gets worse and worse the more leverage you apply
- deleted 7y ago[deleted]
- maest 7y ago> You really don’t know what you are saying. There's no need for the aggressive tone. > Sharpe isn’t changed by leveraging. Indeed, volatility is, however.
- smabie 7y agoA change in volatility implies a change in Sharpe due to volatility drag. This only applies if you are compounding the returns though.
- Felz 7y agoGiven that they're selected for being the very best returns, it's probably a decent (but not completely exceptional) combination of every factor- skill, luck, laundering, connections, etc. https://www.lesswrong.com/posts/dC7mP5nSwvpL65Qu5/why-the-tails-come-apart https://www.lesswrong.com/posts/dC7mP5nSwvpL65Qu5/why-the-ta...