Sharpe ratio
Return earned per unit of risk taken, the usual yardstick for a strategy.
The Sharpe ratio divides what a strategy earned, above a risk-free deposit, by how much its results bounced around while earning it. Two strategies that both made ten percent are not the same if one did it in a straight line and the other swung between plus thirty and minus twenty on the way. The first has a high Sharpe; the second has a low one. Think of it as pay per unit of stomach.
It matters because it makes strategies comparable and because it is the number most easily inflated. A Sharpe measured on the same data the rule was designed on is a rehearsal score; a Sharpe on survivors only is a rehearsal with the failures cut out. The logbook quotes it out of sample, discounts it for every version tried, and asks whether it survives removing the best month.
A rough scale: a Sharpe near zero means the strategy earned nothing for its risk; around one is a serious rule; the numbers in sales pitches are usually above that and usually measured wrong. Our bars are written before each test, and a Sharpe that fails its bar fails the test whatever the raw return looked like.
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Where this word comes up
First needed in the log entry H-016 · Collecting the funding rate is not free money. The price eats what the funding pays.
From the same entry: Bet against momentum, Funding rate, Market neutral, Out of sample, Perpetual futures.