Do you calculate a Sharpe ratio?

We do not calculate anything which we label as a Sharpe ratio, though our risk/reward ratio is very similar to a Sharpe ratio.

There are a number of issues with Sharpe ratios, and at the moment we prefer not to use the term on the website. The reality is that Sharpe ratios are calculated in a number of different ways, and a figure on website A is probably calculated in a different way to the figure on website B:

  • A proper Sharpe ratio should be calculated using historic equity, not balance. However, any calculation of historic equity from trading platforms has to be an approximation based on a feed of historic prices. We think that publishing a "Sharpe ratio" would imply more confidence in the figures than it is possible for anyone to have.
  • Variability #1: everyone agrees that a proper Sharpe ratio should include a measure of a risk-free rate of return. However, no-one agrees on how this rate should be calculated (and whether it should be a fixed figure or should vary over time - though this has been a slightly hypothetical consideration since 2008).
  • Variability #2: (almost) all published Sharpe ratios are annual figures, but some people annualise them from daily returns and some people annualise them from monthly returns. Sharpe ratios based on monthly returns will tend to be higher.
  • Variability #3: we have seen many Sharpe ratios which are based on an arithmetic mean of returns, not a geometric mean. This is hard to justify, but many people - including registered fund managers - use it. Oddly enough, a Sharpe ratio based on arithmetic means will be higher than one based on geometric means.

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