beta adjusted performance / delta adjusted / leverage adjusted?

[Adamus]

Being a futures and forex type of bloke, I don't know jack about stocks and equities. Talking to someone recently who trades only in stocks, I was asked what my beta-adjusted returns were - or was it beta-adjusted risk? And then when I stared blankly at him, he asked whether I had delta-adjusted figures, or leverage-adjusted or net exposure adjusted....

What is all this technical sounding mumbo jumbo? I don't measure risks like that - I look at equity curves of simulations of algorithms trading. I stick to the scenario of 1 lot in the futures market and I start at zero and end up with what I end up with - so I always make infinite % return at least in theory.

I guess I need to start talking in words rather than pictures. Can anyone says what these stats are?

Thanks

 

[Martinghoul]

That someone was trying to estimate your risk-adjusted returns. Specifically, beta-adjusted would probably refer to your risk/return net of your total long/short the index. Similar idea for the other stuff..

 

[Adamus]

Completely missed your reply, sorry. Thank you, belatedly.

Beta-adjusted = risk/return net of total long/short the index

Can I ask more: which stats are the risk and the return? Presumably something like max drawdown is the risk in dollars? Return is profit in dollars? Per annum?

And what does 'net of total long/short the index' mean? When you say 'index' are you assuming I'm trading a stock index like SP or FTSE100 futures? I am. (Or will be). Plus currencies and other futures.

I probably think this is more complicated than it actually is.

And how about Sharpe Ratio? I can do that easily enough, but I've heard most people want monthly - or should I stick with annual, or provide both?

 

[Martinghoul]

They're asking about returns only, but, effectively, they want to see your performance without implicit or explicit outright long/short stock mkt positions. Specifically, if you have a stock portfolio with a beta of 1 and your returns exactly match those of the index, your beta-adjusted return will be 0. They probably want percentage returns per annum. In terms of risk, there's all sorts of measures that can be used, such as max drawdown or VAR.

Basically, the idea is that they don't want people that can buy or sell the stock mkt (or some other benchmark), as there's no reason to believe you (or I) do it better than them. However, if you are able to do something clever, without being too outright long/short, that's valuable.

As to Sharpe, it doesn't really matter whether you use annual or monthly, as you can easily convert between the two. You give your investors whatever measure makes sense to them.

 

[Adamus]

They're asking about returns only, but, effectively, they want to see your performance without implicit or explicit outright long/short stock mkt positions. Specifically, if you have a stock portfolio with a beta of 1 and your returns exactly match those of the index, your beta-adjusted return will be 0. They probably want percentage returns per annum. In terms of risk, there's all sorts of measures that can be used, such as max drawdown or VAR.

So it is strictly a stock market paradigm? I read Trading Risk by Kenneth Grant only last year but obviously none of the information stayed in my head. Looks like I'll have to go back to it. I

 

[Adamus]

So it is strictly a stock market paradigm? I read Trading Risk by Kenneth Grant only last year but obviously none of the information stayed in my head. Looks like I'll have to go back to it. I

Hmm. Good way to end a message.

I think I was going to ask, is this applicable to non-stocks?

 

[Martinghoul]

So it is strictly a stock market paradigm? I read Trading Risk by Kenneth Grant only last year but obviously none of the information stayed in my head. Looks like I'll have to go back to it. I

It's not necessarily just a stock mkt paradigm. For instance, fixed income funds normally have indices that they have to outperform, which means that you can define a beta-adjusted return metric for them also.

 

[Adamus]

Just pulled out my copy of "Trading Risk" and put it on my pile of things to read. So I should get around to it by May :O

So beta is part of the "Capital Asset Pricing Model". So if futures in gold or coffee can't really be seen as capital assets, and even futures on stock indices and bonds, is there any point in using beta? Even if it were possible if I found some general commodities index to use it against?

If not, which I assume, what would you say to someone who asks to know the beta of your trading for the last year? I guess I'd just say, actually I don't trade stocks. Or is there a smarter answer?

 

[Martinghoul]

Just pulled out my copy of "Trading Risk" and put it on my pile of things to read. So I should get around to it by May :O

So beta is part of the "Capital Asset Pricing Model". So if futures in gold or coffee can't really be seen as capital assets, and even futures on stock indices and bonds, is there any point in using beta? Even if it were possible if I found some general commodities index to use it against?

If not, which I assume, what would you say to someone who asks to know the beta of your trading for the last year? I guess I'd just say, actually I don't trade stocks. Or is there a smarter answer?

Well, you could answer this way, but you'd sound a lot smarter if you know what index your performance is being benchmarked against. For example, if you're a commodities guy, you're probably looking at either the GSCI or the CRB Commodity Indices (these two being most common).

Obviously, the issue becomes a bit more complicated if you're a multi-asset and/or multi-strategy person. Most commonly, the benchmark in these cases is the S&P or the Dow, seeing as how they're what the big investors care about. Note that, while beta is about CAPM strictly speaking, there's no reason you can't come up with a beta to the stock mkt for any asset class, provided you have a time series of returns. So in reality you can quantify your beta-adjusted performance no matter what you do. Investors generally want this because it allows them to have a single measure that doesn't depend on the specifics of a particular strategy.