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with the Omega (I seem to recall in was bias issues around skewness and kurtosis, but I might be wrong), however it was unpublished work for hedge funds.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 amibroker@yahoogroups.com, "tf28373" <tom...@...> 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 amibroker@yahoogroups.com, "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 amibroker@yahoogroups.com, "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 > > > > > >
