Picking Upward Nickels Inwards Front End Of Steamrollers

When I was growing upward inwards the trading world, high Sharpe ratio was the holy grail. People kept forgetting the possibility of "black swan" events, alone late popularized yesteryear Nassim Taleb, which tin post away wipe out years of steady gains inwards i disastrous stroke. (For a fascinating interview of Taleb yesteryear the famous Malcolm Gladwell, run across this onetime New Yorker article. It includes a contrast alongside Victor Niederhoffer's trading style, summation a rare close-up sentiment of the painful daily operations of Taleb's hedge fund.)

Now, however, the pendulum seems to accept swung a niggling every bit good far inwards the other direction. Whenever I refer a high Sharpe-ratio strategy to but about experienced investor, I am oftentimes confronted alongside nighttime musings of "picking upward nickels inwards front end of steamrollers", every bit if all high Sharpe-ratio strategies consist of shorting out-of-the-money telephone yell upward options.

But many high Sharpe-ratio strategies are not akin to shorting out-of-the-money calls. My favorite lawsuit is that of short-term mean-reverting strategies. These strategies non alone render consistent modest gains nether normal marketplace conditions, but inwards contrast to shorting calls, they brand out-size gains especially when disasters struck. Indeed, they hand us the best of both worlds. (Proof? Just backtest whatever short-term mean-reverting strategies over 2008 data.) How tin post away that be?

There are multiple reasons why short-term mean-reverting strategies accept such delightful properties:

1. Typically, nosotros piece of employment into into positions alone after the disaster has struck, non before.
   
2. If you lot believe a certainly marketplace is mean-reverting, together with your strategy purchase depression together with sell high, together with then of degree you lot volition brand much to a greater extent than coin when the marketplace is abnormally depressed.
3. Even inwards the rare occasion when the marketplace does non mean-revert afterward a disaster, the marketplace is unlikely to become downward much farther during the curt fourth dimension menses when nosotros are belongings the position.

"Short-term" is indeed the telephone commutation to the success of these strategies. In contrast to the LTCM debacle, where they would boot the bucket on piling on to a losing position solar daytime afterward solar daytime hoping it would mean-revert but about day, short-term traders liquidate their positions at the halt of a fixed fourth dimension period, whether they win or lose. This greatly limits the possibility of ruin together with leaves our equity intact to attain out but about other solar daytime inwards the statistical game.

So, telephone yell upward me old-fashioned, but I soundless dear high Sharpe-ratio strategies.