What is a good sharpe for someone running 10-15 longs and 10-15 shorts sleeve? Does more positions mean it's easier to achieve higher Sharpe?

As above, does more positions on average mean better sharpe? My sleeve is small as in total around 20-30 stocks I trade, every year printing good return %, but Sharpe might be low as its inherent for that small portfolio to be more volatile?

2 Comments
 

Based on the most helpful WSO content, here are some insights regarding Sharpe ratios and portfolio size:

  1. Sharpe Ratio Considerations:

    • The Sharpe ratio is a measure of risk-adjusted return. A higher Sharpe ratio indicates better risk-adjusted performance.
    • For hedge funds, especially those with concentrated portfolios, achieving a high Sharpe ratio can be challenging due to inherent volatility.
  2. Impact of Portfolio Size:

    • More positions do not necessarily mean it's easier to achieve a higher Sharpe ratio. The quality and correlation of the positions matter significantly.
    • A small portfolio (like your 20-30 stocks) can be more volatile, which might result in a lower Sharpe ratio despite good return percentages.
  3. Strategies to Improve Sharpe Ratio:

    • Risk Parity Approach: Develop multiple themes with low correlation and invest in them to reduce overall portfolio correlation to US equity markets.
    • Volatility Management: Adjust position sizes based on volatility. Reduce positions when volatility rises and increase them when it drops.
    • Hedging: Use strategies like shorting the S&P or sector ETFs to manage portfolio correlation and beta.
  4. Example from WSO:

    • Unhedged short volatility strategies tend to have higher Sharpe ratios most years. Limiting downside volatility by not hedging very out-of-the-money options can also help improve risk-return ratios.

In summary, while a larger number of positions can diversify risk, the key to a higher Sharpe ratio lies in managing volatility, correlation, and strategic hedging.

Sources: Difficulty Check, A Contrarian View - Raging Bull, A Contrarian View - Raging Bull, https://www.wallstreetoasis.com/forum/private-equity/blackstone-pe-culture?customgpt=1, Q&A: HF Analyst @ $5bn+ Fund - Breaking In and Transition to Risk-Taking Role

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

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