Don’t Bet the Ranch – Hit Ratios, Asymmetry and Breadth

This paper discusses our framework for assessing the repeatability of performance, using the concepts of hit ratio, asymmetry and breadth. We believe that strategies predicated entirely on being smarter (i.e. having a very high hit ratio) will tend to disappoint, unless supported by longer track records, a clearly identifiable edge and significant asymmetry in implementation. Strategies that primarily seek breadth, with low hit ratios and no asymmetry, can fare very well for many years but typically run high levels of leverage and correlation risk that can result in unexpectedly large drawdowns, especially during financial crises. We favour approaches that seek to combine the benefits of all three performance drivers (hit ratio, asymmetry and breadth), rather than relying on any one. Such strategies are more likely to generate attractive and repeatable Sharpe ratios that are demonstrably not the result of luck and do not necessitate unreasonably long investment horizons.

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