4 ms·
Sure, I'll give some numbers. Sharpe ratio = (Your return annually - Annual Risk Free rate) / ( Annualized Vol of your portfolio). BB = Bulge Bracket, basical
by mamonster 1y ago
Sure, I'll give some numbers.
Sharpe ratio = (Your return annually - Annual Risk Free rate) / ( Annualized Vol of your portfolio).
BB = Bulge Bracket, basically a Tier 1 Bank (Goldman, UBS, MS, Citi, google the list).
Equities = Stocks.
Delta 1 = If underlying moves by X $, your product/ derivative moves by X $. Basically swaps, etfs, futures, etc.
Now for some numbers: Say you are under a "vanilla" 2/20 structure (which is actually like 10 years out of date but is still listed on all finance websites) where your fund charges a 2% management fee (i.e if you manage 5 mio USD you charge 100k per year for fund cost) and 20% performance rate on your gross above benchmark ( so you take 20% of the return above your benchmark).
Annualized SP500 vol is let's say 18%, your cash return right now is 3.5%. Quick maths gets you to 4 Sharpe is about 75% yearly return. ((75-3.5)/18 is about 4).Under these assumptions, 4 Sharpe return on 5 mio is 3.750mio.
Your performance fee as a HF manager is gonna be 0.715(75%-3.5%) x 0.2 x 5mio = 715k. So 4 Sharpe on 5mio is basically you earning 900k-1mio USD (depends on the jurisdiction for your base, i took like 180k USD for base) as the HF manager.
Edit: For people who don't trade professionally, capacity (i.e how much money your strategy/you as a trader accept before becoming inefficient/losing money) is the big filter. There's a shitload of strats that work at 1 mio USD but completely stop at 2mio or 5mio.
- rokobobo 1y agoI think people were asking you to explain what kind of strategies people run at sharpe 4
- mamonster 1y agoFrom people I know personally: "Arbs" on stuff that big desks don't touch because of capacity (small mergers for example, you lever up on 2-3 small merger arbs per year and you are almost there); DEX to liquidity pool latency arbs for shitcoins if you want a crypto example; Pure arbs (One of my friends who admittedly is not satisfied with 1mio USD comp did this trade: https://notion.moontowermeta.com/financial-hacking-etf-vs-negative-oil-futures https://notion.moontowermeta.com/financial-hacking-etf-vs-ne... ). Edit: The other option is that if you are a trader in "special" markets (the best example is biotech/medstocks) where domain knowledge really matters being 4 sharpe is basically 1 good trade a year, and at 5mio USD AUM you are always at capacity.
- bionsystem 1y agoI wonder why people always assume that the strategy would be algorithmic or systematic. How about global macro, long/short equity, or even plain long only done well ? Actually studying markets and assets fundamentally, and finding asymmetric bets ? There are plenty of people that have done that successfully over really long periods of time, I doubt markets are perfectly efficient just because some academics claim so, especially for bets with strong convexity.