An incomplete list of caveats to Sharpe off the top of my head:
We can never measure the true Sharpe of a strategy (how it would theoretically perform on average over all time), only the observed Sharpe ratio, which can be radically different, especially for strategies with significant tail risk. There are a wide variety of strategies that might have a very high observed sharpe over a few years, but much lower true Sharpe
Sharpe typically doesn’t measure costs like infrastructure or salaries, just losses to the direct fund. So e.g. you could view working at a company and earning a salary as a financial strategy with a nearly infinite sharpe, but that’s not necessarily appealing. There are actually a fair number of hedge funds whose function is more similar to providing services in exchange for relatively guaranteed pay
High-sharpe strategies are often constrained by capacity. For example, my friend once offered to pay me $51 on Venmo if I gave her $50 in cash, which is a very high return on investment given that the transaction took just a few minutes, but I doubt she would have been willing to do the same thing at a million times the scale. Similarly, there are occasionally investment strategies with very high sharpes that can only handle a relatively small amount of money
Nice ones. The first is probably the one that most accounts for funds like Titan marketing themselves misleadingly (IMO), but the others are still important caveats of the definition and good to know.
An incomplete list of caveats to Sharpe off the top of my head:
We can never measure the true Sharpe of a strategy (how it would theoretically perform on average over all time), only the observed Sharpe ratio, which can be radically different, especially for strategies with significant tail risk. There are a wide variety of strategies that might have a very high observed sharpe over a few years, but much lower true Sharpe
Sharpe typically doesn’t measure costs like infrastructure or salaries, just losses to the direct fund. So e.g. you could view working at a company and earning a salary as a financial strategy with a nearly infinite sharpe, but that’s not necessarily appealing. There are actually a fair number of hedge funds whose function is more similar to providing services in exchange for relatively guaranteed pay
High-sharpe strategies are often constrained by capacity. For example, my friend once offered to pay me $51 on Venmo if I gave her $50 in cash, which is a very high return on investment given that the transaction took just a few minutes, but I doubt she would have been willing to do the same thing at a million times the scale. Similarly, there are occasionally investment strategies with very high sharpes that can only handle a relatively small amount of money
Nice ones. The first is probably the one that most accounts for funds like Titan marketing themselves misleadingly (IMO), but the others are still important caveats of the definition and good to know.