Your second example (to me) demonstrates the issue with your first. If over a 5y window you can be convinced that US equities have a Sharpe >1, you can be convinced over a 5y window that BTC has a Sharpe > 1.5.
[The Sharpe of the best performing stock is always going to be phenomenally high, does that refute this—I say no, on the grounds that we’re interested in ex-ante Sharpe. If the strategy “always buy the best performing stock” had a Sharpe ratio of >> 0.5 then I would be interested, but I don’t believe that is what we see.]
To be clear, I don’t believe that Sharpe (in general) tops out at 0.5. I think there are plenty of strategies which have Sharpes >> 0.5. I just don’t think they are especially relevant in this context. (Usually because they are capacity constrained, although there are other reasons).
To be honest, if you don’t find 0.5 convincing—that’s fine. You should have even less faith in the value of prediction markets. Nothing wrong with that—it’s the whole point of my post. I just wanted to give people a little hope (or at least the hope I have).
I was also surprised to read that because I was always under the impression that the SR of bonds is higher than that of stocks over a long time, and the SR of the stock market over a long time (much longer than 5 years) is about 0.5.
However, when I looked into the data more closely, the recent (1976-present) high sharpe ratio of bonds seems to be an extremely temporary phenomenon related to the large decline in interest rates during this time. The SR of bonds prior to 1976 is actually worse than stock index SR. So when looking at a very long timespan (on the order of about 100+ years), I actually agree with SimonM on this upper bound for assets now.
At the very least, I do not know of any asset classes with 100+ years of history that have SR over that period significantly greater than 0.5
One of my favourite papers The Rate of Return on Everything suggests that property might have Sharpe ratios > 0.5 with 100+ years of history, although I generally think that the volatility is somewhat underestimated there. (It also has a lot of data on the Sharpe ratios for long bonds + equities across a wide range of DM for long histories)
Assuming Sharpe tops out at 0.5 seems wrong. Over the last 5 years, Bitcoin has had a Sharpe ratio of 1.6 the Wilshire 5000 has had a Sharpe of 1.04.
Your second example (to me) demonstrates the issue with your first. If over a 5y window you can be convinced that US equities have a Sharpe >1, you can be convinced over a 5y window that BTC has a Sharpe > 1.5.
[The Sharpe of the best performing stock is always going to be phenomenally high, does that refute this—I say no, on the grounds that we’re interested in ex-ante Sharpe. If the strategy “always buy the best performing stock” had a Sharpe ratio of >> 0.5 then I would be interested, but I don’t believe that is what we see.]
To be clear, I don’t believe that Sharpe (in general) tops out at 0.5. I think there are plenty of strategies which have Sharpes >> 0.5. I just don’t think they are especially relevant in this context. (Usually because they are capacity constrained, although there are other reasons).
To be honest, if you don’t find 0.5 convincing—that’s fine. You should have even less faith in the value of prediction markets. Nothing wrong with that—it’s the whole point of my post. I just wanted to give people a little hope (or at least the hope I have).
I was also surprised to read that because I was always under the impression that the SR of bonds is higher than that of stocks over a long time, and the SR of the stock market over a long time (much longer than 5 years) is about 0.5.
However, when I looked into the data more closely, the recent (1976-present) high sharpe ratio of bonds seems to be an extremely temporary phenomenon related to the large decline in interest rates during this time. The SR of bonds prior to 1976 is actually worse than stock index SR. So when looking at a very long timespan (on the order of about 100+ years), I actually agree with SimonM on this upper bound for assets now.
At the very least, I do not know of any asset classes with 100+ years of history that have SR over that period significantly greater than 0.5
One of my favourite papers The Rate of Return on Everything suggests that property might have Sharpe ratios > 0.5 with 100+ years of history, although I generally think that the volatility is somewhat underestimated there. (It also has a lot of data on the Sharpe ratios for long bonds + equities across a wide range of DM for long histories)