The Sharpe Ratio Broke Investors’ Brains

Goodhart’s Law: When a measure becomes a target, it ceases to be a good measure.

The ratio has changed investor behavior. We chase the metric rather than the underlying quality it is trying to assess, and there are plenty of situations where the Sharpe is a poor metric of quality.

And there are unfortunately major losses, which keep on demonstrating the point – LTCM, AIG, Malachite…

Credits to Richard Wiggins, CFA, CAIA at the Institutional Investor. 

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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