I have switched from Alpha measuring metrics to Sharpe Ratio for my portfolio. Hopefully this would help me adjust my risk according to my returns, and measure my performance peg against other mutual/hedge funds.

How to calculate Sharpe Ratio:

1. Use Excel
2. Use a professional software
3. Get a professional Fund Administration services Company

The obvious is to use Option 1.

The formula is as shown:

Average daily / monthly PnL returns % – 3/6/12 months Treasury Risk free rates

___________________________________________________________

Standard Deviation of Average daily / monthly PnL returns %

Ok, enough of the jokingly display of serious stuff here but in essence(with Excel formula):

(AVERAGE(A1:A10) – 0.0007) / STDEV (A1:A10)

If A1:A10 is the AUM PnL returns based on either in Days or Months, and the Risk free rates for 3 months is 0.07%, then this formula would apply.

With my Daily AUM updated base on the actual value of my portfolio (After using margin/leverage, negative cash, the actual value, realized/not realized) from my Brokers daily reports, I am able to record down the daily movements. With these data, I simply plug the figure into my excel spread sheets, using opening and closing AUM to get the daily PnL %, to calculate the monthly Sharpe ratio, Monthly PnL, Cumulative PnL% and even Annualized Figures. With these daily I’ll introduced another metric called Impact Ratio:

How to calculate Impact Ratio:

Another important metric introduced was the Impact ratio. Since I do trade “often” perhaps 10-50 trades a month with good movements and volatility or opportunities, or just simply 2 trades a month, the Impact Ratio measure how fast (slow) / how volatile you took to realized profits (loss).

1) Take each day’s Closing AUM and deduct the Opening AUM
2) Derive how much PnL made for the day, be it realized or unrealized.
3) Derive a daily data for a month of profits and losses.
4) Sum up all daily Profits for the month
5) Sum up all daily Losses for the month
6) Take the profits over losses. That will be your Impact Ratio

The reason to use this ratio is calculate how well you manage your portfolio’s profits and losses. Obviously if its a negative value, you may be experiencing a bad month, and a higher negative value means you are “slow” to stop the bleeding or “volatile” loss for the month.

Say your End of Month Impact Ratio is 2, which comes from having $2000 / $1000. This data would  be better off than another portfolio say Impact Ratio 1.5, with a $150/$100. The latter has lower Impact Ratio (Worst) than the former (Better), with its total Profits over losses for the entire trading days much lower.

Now say we combine the Sharpe Ratio and Impact Ratio, and what do we have ? With the exam of $2000/$1000, and $130/$100, we never know how Example 1 obtained the profits of $2000 and a loss of $1000, versus the 130/100.

Simply by using Sharpe Ratio, we can determine the rewards with risk in 2000/1000, and one with 150/100. Maybe the 2000/1000 was obtain with great risk. Maybe the 150/100 had too little risk to reward.

Summary:

By combining my other metrics such as calculating Monthly PnL, Trade % wins, replacing the old Alpha calculation with Sharpe Ratio and Impact Ratio, I hope to measure and improve my portfolio performance any, of course, my skill in managing investments and portfolios.

Files under Monthly Fund performance | 5 Comments | 5 Comments »

Managemoneyonline.com is a website, a blog that I have created to write down my ideas and experience I have encountered. These serve as a track record for me and myself and for everyone else to learn. Trading and investments is a difficult tasks.

I lost quite a few grands, about $9,000 for my first year of noobish trading. That was after the 2008 financial crisis and it was some bull run to 2010, but I still lost. While I am trying to learn “everything”, yes you heard it, everything about trading and investments, I will jot down some of my experiences, and strategies as well.

Well the main key words for this site, manage money, already tells you that I am all about managing money. Afterall, no matter how daring and how much risk profile you want to take, Wall street, or the stocks market is just a random reactions of ups and downs. No repeated patterns no nothing, because if there is, even a 3 year old kid could understand.

With that bad experience, I’ve went deeper and deeper into this art or science. On the second year of my trading, I started building a small portfolio, instead of blindly trading. Reading up and understanding even more detailed into investment banks, financial institutions and hedge funds, I wanted to do what the big guys are doing.

While I go about managing my small little portfolio, hoping to beat the market and growing equity, by measuring my performance with the general market / hedge funds. With strategies such as statistical arbitrage, law of one price, portfolio rebalancing and management, risk management, long/short equities, high income stocks and dividends, and other strategies that I’ve tried, this is the outcome of a true results of a trader who trades his own personal account.

I hope I am able to grow my own funds through this never ending, tiring process of seeking The Truth, the Alpha.

Files under Hedging strategies, Managing Risk, Market Sentiments, Monthly Fund performance, Portfolio Management | Leave a Comment | No Comments »