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
