Does anyone here request/calculate sortino or omega ratios from funds that they analyze? I’m shocked at how often standard deviation and the sharpe ratio is used among funds pursuing strategies with non-normal distribution of returns. I’ve listened to very smart PM’s running a managed futures strategy explain their risk/reward profile in terms of the Sharpe ratio and it blows my mind.
They must be doing it because the Sharpe ratio is just so popular and they assume most people won’t understand what they’re talking about if they go into sortino and omega.
I want to request the sortino and omega ratios but I’m not sure if they’ll think this is an unusual and rediculous ask.
i don’t think sortino would be all that much better than sharpe and omega, i don’t even remember studying that, so i can’t really debate it, but by definition seems to be more robust. it surely sounds powerful, created by God himself. people use sharpe b/c it’s popular. can you explain some of the problems with the omega ratio? maybe there’s a reason it isn’t used…
Omega requires you to determine your own threshold, or thresholds, so while it’s very informative, there’s not really a standard threshold that all funds would report on. It’d be difficult for funds to put this in their educational materials or presentations and have it be informative when you compare them to other funds.
It’s hard to explain why sortino is much better than sharpe without getting into numbers and an example. Basically if you compare the sharpe ratios of say the S&P 500 vs the BTOP50, you’ll be greatly undervaluing the performance of managed futures. Essentially the standard deviation of managed futures is too high due to large positive performance. I’m not worried about large volatility to the upside, just the downside.
That might have been a great Carnival (old HBO show) reference but that would have been beyond impressive.
On topic, when institutional buyers look at funds, none of the three metrics come into play. Personally, I love Sortino and have made decent money using it as a primary screen.
Downside volatility is what concerns people - you won’t hear people complaining that an investment went up 70%, but down 70% may be a different story. For example, which one is better:
Right, but those returns need to be extremely non-normal before the sortino ratio diverges greatly from the sharpe ratio. That’s the challenge. In theory, it captures things better, by prioritizing downside deviations, but in practice, there isn’t a huge difference until it’s too late to act on the information.
As shown in the Morningstar study below, the equal weighted CTA index has a sharpe ratio of 0.16 versus the 0.15 for the S&P 500, a slight improvement. The sortino of the CTA index is 0.76 versus the 0.41 for the S&P 500. It’s clear that sortino can shed light where the sharpe can’t and that it’s a very useful metric… my original question was if it would be overly burdensome on portfolio managers and their staff to request it, as most will only report sharpe.
If you’re a big enough investor, you can request a Sortino Ratio written in nice calligraphy using the blood of young virgins, should you desire it.
Most non-retail investors probably can request it without it being overly burdensome. If you’re a retail investor, that may be trickier, but annual reports might contain it, if it’s a mutual fund.
As for marketing materials, most strategies will report the Sortino Ratio if it makes them look better compared to competing products, and omit it if not.