When computing the Sharpe for a strategy, should the shut down period be considered?
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1$\begingroup$ I think people would be more inclined to answer if you clarified your post. For example, what do you mean by shut down period? $\endgroup$– RichardSep 9, 2020 at 13:13
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1 Answer
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It usually depends on:
- the reason why the strategy was shut down
- what are you using the sharpe ratio number for
Examples:
you're a discretionary trader and at a certain point decide to go all in cash for the next month. It's reasonable to include shut down period into calculation, since the decision was a part of your strategy
you run an algo strategy and suddenly loose access to the market for the next month. For the purpose of evaluating the strategy it makes sense to exclude that period altogether. At the same time if you have a way to reasonably simulate the performance during that month the investors may ask to include that in the overall stats to make sure you're not excluding periods with bad performance.
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$\begingroup$ Thanks for the answer. For my case, the strategy is shut down by some generated signal. The sharpe number is used for comparing the different parameters of the strategy and select the 'best' one. I would expect the shut down period be included. However a different view is that the shut down period doesn't use the actual capital. Including it would distort the actual performance of the strategy. I think it kind of make sense from a firm level. May I know ur opinion on this? $\endgroup$– Lei HaoSep 10, 2020 at 2:10
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$\begingroup$ Without knowing the details, I'd say if you compare 2 strategies, where one strategy shuts down itself for some time and the other strategy doesn't, the performance during that period is important and the second one should be penalized for loosing money when the first one stayed in cash. If they both don't trade during that period, obviously it doesn't matter if you include that period or not. $\endgroup$– LazyCatSep 10, 2020 at 21:38