I strongly agree. This is the moment when Ulcer Performance Index steps in - check this one out, since it is based on measuring risk in the terms of drawdown regarding its duration. By the way thanks for your comments about Omega - it seems that on the one hand AIRAP can add something positive into system performance analysis, on the other - it has some drawbacks.
Anyway my mind is still overoccupied by the idea of deriving the system virtues and equity line features from simple mean - deviation analysis (together with using such indicators like profit factor, power factor, expectation). Have you ever ponder on this one? --- In [email protected], "sdwcyberdude" <scwalker1...@...> wrote: > > 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 wrong), however it was unpublished work for hedge funds.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 [email protected], "tf28373" <tomfid@> 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 [email protected], "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 [email protected], "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 > > > > > > > > > >
