Let's assume we have two long short equity strategies
B with a Sharpe ratio of
2 each. Ignoring scalability, trading costs, turnover etc. We want to simply compare how efficient two strategies are using their capital.
A returns 10% on it's capital yearly and strategy
B returns 1% on it's capital yearly. This could be possible if strategy
B just has very low volatility. Obviously
A is better because its using it's capital more efficiently. This calculation is very simple when we are comparing % returns. But % returns only makes sense of the capital allocation is roughly constant i.e. we have for example a constant
10m $ invested in each strategy.
A third strategy
C - also with a Sharpe ratio of
2 - has highly non-constant capital allocation let's say between
1m $ and
10m $ invested. It wouldn't make sense to keep strategy
C at a constant allocation because of the way it trades. Let's say for example it reacts to events that unevenly distributed.
How can I compare how efficiently the strategies are using their capital and rank them? Are there any established metrics for that?