Good points. I strive to spend 90% of my focus on deriving and measuring the underlying edge, why does it exist, when did it exist & does it still exist, how is it captured + measured. Last 10% is spent on the system metrics, etc. The big dog, "The Edge", seems not to be discussed very much by many people.
Regards, Scott --- In [email protected], "tf28373" <tom...@...> wrote: > > I strongly agree. This is the moment when Ulcer Performance Index steps in - > check this one out, since it is based on measuring risk in the terms of > drawdown regarding its duration. By the way thanks for your comments about > Omega - it seems that on the one hand AIRAP can add something positive into > system performance analysis, on the other - it has some drawbacks. > > Anyway my mind is still overoccupied by the idea of deriving the system > virtues and equity line features from simple mean - deviation analysis > (together with using such indicators like profit factor, power factor, > expectation). Have you ever ponder on this one? > > --- In [email protected], "sdwcyberdude" <scwalker1986@> wrote: > > > > Tomasz, > > > > I also use and see value in the Max DD, however, I believe it is should > > only be a "secondary" measure. > > > > Think of a 10 year backtest. System X has 1 drawdown of 30% (max), and > > many small drawdown never exceeding 5%. System Y has 1 drawdown of 25% > > (max), and 10+ other drawdowns between 20 and 23%. > > > > Which system is more "stable"? I will invest risk capital in System X, > > which has the higher max drawdown, but much fewer drawdowns of depth. > > > > I would love to have a measure of drawdown that more directly and > > intuitively measures the depth and frequency of drawdowns per unit of time. > > Correlation of the equity curve also gets at that point. > > > > Regarding the Omega, I am relying on a friend who studied both the advanced > > math and models and uncover significant concerns with the Omega (I seem to > > recall in was bias issues around skewness and kurtosis, but I might be > > wrong), however it was unpublished work for hedge funds. He also developed > > a proprietary alternative. Sorry I can't be more helpful on that one. > > > > Kind Regards, > > Scott > > > > --- In [email protected], "tf28373" <tomfid@> wrote: > > > > > > Hi Scott > > > > > > Thanks for response. I agree that the Sortino ratio is a kind of solution > > > to the typical Sharp ratio disadvantages (like penalization high > > > moments, which for me is irrational). Nevertheless, there is no max dd > > > taken into account, which confuses me a bit. However, I might be too > > > devoted to this risk measure (max dd) - what do you think? Is mean and > > > its variance better/sufficient values as far as the characteristics of > > > equity line is considered? (This is what brain123 was supporting in many > > > discussions.) > > > > > > "One should be careful if it is built upon the Omega, which I believe > > > introduces other problems." > > > > > > That is an interesting point - can you elaborate a bit on this one? In > > > fact I was hoping to get this kind of information when starting this > > > thread as - frankly speaking - I don't feel familiar with plain maths > > > enough to analyse it... > > > > > > Looking forward to your response. > > > Regards > > > Tomasz > > > > > > --- In [email protected], "sdwcyberdude" <scwalker1986@> wrote: > > > > > > > > Tomasz, > > > > > > > > Thanks for raising this question (and for the good work you do). > > > > > > > > The Sortino Ratio is a well regarding improvement upon the Sharpe; I > > > > urge you to consider adding the Sortino to the base metric array. Is > > > > there a reason you passed on it earlier? > > > > > > > > The Sharpe ratio has a lot of problems and I was not familiar with the > > > > AIRAP. One should be careful if it is built upon the Omega, which I > > > > believe introduces other problems. > > > > > > > > Regards, > > > > Scott > > > > > > > > --- In [email protected], "tf28373" <tomfid@> wrote: > > > > > > > > > > > > > > > Hello everyone > > > > > > > > > > I have been working on the choose of fitness function following the > > > > > Howard Bundy's advices in his "Quantitative Trading Systems" and come > > > > > across M. Sharma's Alternative Investments Risk Adjusted Performance > > > > > (AIRAP). > > > > > > > > > > The equation of it is as following: > > > > > > > > > > AIRAP = [ E pi*(1+TRi)(1-c) ] 1/(1-c) - 1, > > > > > > > > > > where TRi - ith period total fund return (in my opinon it can also be > > > > > ith trade net return), c - risk aversion parameter (author suggests to > > > > > set its value to c=4), i=1,...,N - number of periods (as for me it can > > > > > be number of trades), pi - the probability of the ith period's total > > > > > return (according to the author it can be replaced with 1/N). (For > > > > > futher information please check this working paper: > > > > > http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf > > > > > <http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf> .) > > > > > > > > > > M. Sharma argues that this measure captures all higher moments, > > > > > penalizes for higher volatility and leverage (downside risk is > > > > > penalized > > > > > more) and has all merits of Sharp ratio, though without its > > > > > limitations > > > > > and disadvantages. I have carried out some simulations on the > > > > > artificial > > > > > returns of different distributions and indeed it makes some > > > > > difference. > > > > > Nevertheless what I am suspicious about is the fact that it was the > > > > > very > > > > > first time I found this objective function even though it was created > > > > > by > > > > > Sharma about 5 years ago. As for me it can mean that AIRAP is in fact > > > > > far from being effective or/and practical fitness measure at least for > > > > > trader like us and nobody use it (maybe I am wrong...). Another issue > > > > > that concerns me a bit is omission of MaxDrawDown in the equation, > > > > > which > > > > > - at least for me - is a very important risk measure. According to > > > > > many > > > > > experienced wise people writing on this forum (like ex Mr Bundy), an > > > > > effective fitness function shouls take Max DD or some comparable risk > > > > > measure into consideration in order to be really useful. > > > > > > > > > > What do you think about AIRAP? Should I proceed with utilizing this > > > > > function? > > > > > > > > > > I am looking forward to your response. Thank you in advance. > > > > > > > > > > Tomasz > > > > > > > > > > > > > > >
