Stumbled on this today and found that on average FX-focused hedge funds have a mind-blowing Sharpe ratio of 1.1 even though with the decrease volatility in FX lately and their profits are still generating a Sharpe ratio of 1.1 compared to before when it was 2.
'Although the lower volatility returns’ profile of the hedge fund sector in general – an average Sharpe ratio of 1.1 and a high of 2.0 during the past five years – has indicated to institutional investors that hedge fund managers in general are more adept at generating additional returns, even when taking on less risk, for FX-related funds headline low market volatility results in the inability to rely on any single strategy, be it carry, momentum or mean reversion.'
Obviously you can't just generate that from pure vanilla trading of FX pairs, you gonna need options and derivatives, but still what's your Sharpe ratio. And what do you guys think is a good ratio for an average one-man FX trader? Do you place any importance on stuff like that? Any thoughts?
Personally, I don't compare my returns to the 'risk-free' rates like 10-year US treasury bonds. Since the current yield of the 10-year US treasury bond is 2.76%, then if your yearly returns are 2.76%, then you're Sharpe Ratio is about 1.0 (give or take). The only Sharpe that I use is for writing with. I think the article is suggesting that the average hedge fund is finding it difficult to make yearly gains that beat the 10-year bond yields due to lower volatility in the market. I totally agree with this. Interestingly, the top hedge fund in 2012 made a YTD Total Return of +37.8% which means a Sharpe Ratio of about 13.7 (i am not including standard deviation calculation since I don't know the performance of other years). Top dog looks pretty good.