Richard Craib (@richardcraib): How important is the quant hedge fund’s Sharpe in this analysis? Do things get bad if the hedge fund component is the same 10% return but on 20% volat…

How important is the quant hedge fund’s Sharpe in this analysis? Do things get bad if the hedge fund component is the same 10% return but on 20% volatility (Sharpe 0.5)? or way better if the hedge fund is 10% return on 5% volatility (Sharpe 2)? Assuming the same 10% expected return and varying the volatility, Sharpe isn’t actually such a big deal. Median outcome of $1 in QQQ + 10% uncorrelated alpha past 10 years. Sharpe 2 → $15.8 Sharpe 1 → $15.3 Sharpe 0.5 → $13.2 (QQQ alone → $6) Sharpe 0.5 simulations have drawdown coincidence with QQQ a little more often and more vol drag so you lose a little. But the difference between Sharpe 1 and 2 is 50c in 10 year median. The real Sharpe tax is survival. A standard -20% LP drawdown limit fires the Sharpe 0.5 fund in 97% of paths!