Sharpe 1.8 good enough?

Hi guys, my strategy's Sharpe has been 1.8 for the past three years (average 3%/yr return). Would that be acceptable to approach MM for PM role? This is for quant equity l/s.

If so, what is the best way to approach? Other than the usual stuff (resume etc) how do we pitch the strategy? What are the typical steps?

Is it realistic to get a better deal than ~15% pnl cut / 5% dd limit? What starting capital would be fair?

Thanks much

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Comments (27)

Most Helpful
Jul 20, 2021 - 7:41am

I think 3 years of live record is ok to start a conversation, but a couple of questions that can be helpful for them to allocate capital to your strategy

- is the return audited/live/backtest?

- what capacity/AUM have you been running it with? what is the max capacity it can run?

- what is the correlation to main market indices/ typical risk factors i.e Fama French/ to other existing PMs' strategies?

- what is the drawdown profile during stressed periods/ return distribution (negative/positive skew?)

- what is the trading frequency/holding periods of the strategy? 

- do you own the IP or does the IP belongs to your existing firm

- etc

No need to answer here if you think it's confidential, but I just want to give you more colors to think about before you apply to them. Good luck!

I believe other more experienced members can share more insights as well.

Jul 20, 2021 - 10:19am

Thanks, it's been trading live as a big chunk of a combined book. So not separately audited except for a regional account that is almost entirely my strategies. Although I would not be allowed to share that info to outside firms. It's tricky to move internally given all the politics but not entirely impossible... The capacity is not an issue given the small scale I'll be looking to start (few hundred mm easily) and should be able to scale reasonably.

Any tips on how to approach, and what to have in hand when starting the discussions?

Jul 20, 2021 - 1:25pm

To state the obvious, it's not just the performance but also the process that matters. Be prepared to explain how you do things.. search for alphas, execute, time, etc. You want to convey a process that is disciplined, consistent and repeatable. Obviously you need to respect confidentiality, but try hard to be clear, concise, and to speak in a way that even the uninitiated can understand.

I'm not a quant, but even on the fundamental L/S side I'm amazed how few people can articulate a process that is structured and mature. A lot of people just ramble and sprinkle a bunch of buzzwords to impress, but the biz dev people at MMs know their job, and it involves parsing through the bullshit.

It might be a good idea to ask yourself what your process involves, and to write it down to make sure it comes across well-structured. This would be good prep for the interviews, where you'll surely be asked the question.

Jul 20, 2021 - 3:21pm

Thanks, these are indeed very good points, it surprises me to see that a lot of people in the industry don't understand that.

Out of curiosity, what sort of track record is expected of fundamental L/S PMs (return/Sharpe, etc). Are the contracts similar in terms of pnl cut and drawdown limits?

  • Research Analyst in HF - Other
Jul 22, 2021 - 9:56pm

Can you describe your process sir? As succinct as you want it. I've always faltered with this step when speaking to biz dev folks at MMs (admittedly this is the first step in all the processes so not a good look for me I know). But I've never really had a mentor or someone to help me refine and think through an investing framework or process fit for the L/S Equity hedge funds

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Jul 20, 2021 - 9:42pm

I wouldn't be too discouraged by 3% given it is simply a function of target volatility and Sharpe. If the OP's Sharpe is indeed 1.8 on average, he can scale it up to 5% target annualized vol, which should translate to ballpark 9% annual return. If this has a low (the lower the better) correlation to equity indices and rates, that's actually quite good.

  • Research Analyst in HF - EquityHedge
Jul 24, 2021 - 4:18pm

This makes sense, however I have to disagree with one point. High Sharpe is good, sure, but it's not enough, at least for the MM case where you typically don't have control over "scaling" (i.e. leverage). You are given a risk capital and your mandate is to make money with good risk management so that you don't blow up. You don't get paid by Sharpe.

  • PM in HF - Other
Jul 22, 2021 - 10:52am

I have been in the industry long enough to know that you are either Jim Simons or a high school kid, the odds are skewed badly

  • Research Analyst in HF - EquityHedge
Jul 26, 2021 - 7:57am
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