A few items grabbing my attention this week…
I have a number of thoughts RE: Rosenfeld’s presentation, most of which could be summed up with the word “hubris”, but the biggest “I can’t believe it’s not humble” moment is Rosenfeld’s apparent continued belief that risk of loss can be perfectly quantified (and his denunciation of those who think otherwise). Ridiculous.
Condor tackles a subject that receives far too little attention from traders and I think anyone who is a serious mechanical trader needs to take the time to at least wrap their head around the concept. I’ve covered this previously in Transactional vs Confidence-based Trading Strategies.
Another from Condor.
It’s a struggle to make investors really understand and internalize why risk-adjusted returns (and not just absolute returns) are important. Condor’s sums it up nicely in language we can all understand…
Absolute performance is, ultimately, all that matters. But as long as there are human animals choosing strategies and allocating capital, some accommodation must be made for the cognitive biases and innumerable flaws to which we are prone. One way of coping with the fact that any trading system will be subject to what we might simply call “human risk” – the danger that the well-dressed ape sitting behind a desk will break something – is to construct strategies that are less likely to agitate anyone. That means targeting not just absolute returns, but also returns that are less volatile and more consistent. Sharpe, Sortino, and other common metrics do just this: they recognize that a strategy is more valuable if it doesn’t goad the wildlife needlessly.
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