- No BS. Just Bullish.
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- No BS. Just Bullish.
No BS. Just Bullish.
Sharpe | Feelings
The Wall Street Skinny
October 03, 2024
This Week on The Floor
Hi friends! A huge thank you to everyone who has reached out to make sure I’m safe in Charlotte, NC. We are absolutely fine after the storms, but the devastation nearby is unimaginable.
While our hearts are with everyone who has been impacted by Hurricane Helene, we figured we’d keep things light and fun with today’s newsletter.
Today we’re highlighting a recent WSJ article about Sharpe ratios at my former client Millennium, answering listener questions about relationships on Wall Street, and continuing with week two of our training in reading the financial news.
And if you haven’t joined the waitlist, our flagship course will be released in just a few weeks! Make sure you’re the first to know so you can access special pricing and bonus offers here.
What’s all the fuss about Sharpe ratios?
How to deal when dating someone who works on Wall Street?
Week 2 of learning to read the financial news
Markets Recap / Deal News
Interviewing this week? Here’s some content for your conversation.
The WSJ published an article this week about the hedge fund Millennium, one of my former clients.
Millennium is a ~$69bn multi-strategy (or “pod shop”) hedge fund. It’s a household name on Wall Street and has made headlines with some wild compensation packages in the trading talent wars.
The focus of the article was on how Millennium has used tight stop-losses to achieve success:
Source: The Wall Street Journal
What’s a "stop-loss”? It’s a risk limit imposed by the firm.
Per the WSJ, “For example, portfolio managers who are allocated $1bn can lose only $50mm [note: that is 5%] before that buying power will likely be cut in half. If they lose an additional $25mm, they will likely be fired.”
Scaled to mere mortal terms, that means if you made a $1,000 investment and lost $75, you’d be out of a job.
Having tight stop losses is critical to maintaining high Sharpe ratios, one of the most commonly used metrics for risk taking performance on the street.
Not me frantically googling “what is a Sharpe ratio” before my hedge fund interview…
A Sharpe ratio is simply a way to gauge the returns you generate relative to the risk you took to generate those returns. We calculate this as:
(annualized return - risk free rate) / annualized volatility
If you can make a 10% total return, and the risk free rate is 5%, your excess return is 5%.
And if you do that with 5% volatility in your investment, it looks a heck of a lot better than if you do it with 20% volatility.
For example, the Sharpe ratio of the S&P500 from 1961 - 2024 is something like:
(~10.38% - ~5.00%) / 15.00% = 0.3
In general, you want a higher Sharpe ratio. In fact, many hedge fund managers allocate capital to individual PMs on a Sharpe ratio basis.
Per the Wall Street Journal article, “Since its inception, Millennium scores a 2.6 on this metric, know as the Sharpe ratio. That is more than double the 1.1 that a broad hedge-fund index achieved over the past five years, according to Barclays.”
If you are interviewing for any kind of trading or markets-based investing position, being able to speak to Sharpe ratios and understand how they relate to risk limits will set you well ahead of your competition!
“How do I deal with a Hedge Fund boyfriend?”
“My only true love is the markets, babe”
We got asked this question verbatim on social media: “How do I deal with a Hedge Fund boyfriend?”
I’m going to reframe this question as “how do I emotionally support and feel supported by someone in a high stress Wall Street role?”
And frankly this applies to relationships with anyone in a role with massive risk and responsibility.
It’s easy for outsiders to think “how glamourous. Your partner must be fancy and rich!”
But the constant stress and exhaustion that comes with this kind of role is enormous.
You just read how a loss of 5% — quite common for a crappy month in the markets — could mean you’re out of a job at some funds.
The amount of emotional and physical bandwidth leftover at the end of the day is minuscule. People prioritize what makes them feel good and what's easy.
Building intimacy may look different from your friends' relationships and what you see on tv, and you have to be sure you're ok accepting that.
Instead of expecting your partner to show up with flowers and a dinner reservation on a Friday night, they may want to sit in front of a blank tv, order a pizza, and stare at their phone.
That may be a way to emotionally decompress.
If they do want to talk, speaking their language and understanding what they’re actually stressed about is huge.
When you're legitimately engaged in a conversation about why someone's work is stressful, they feel comforted and supported. They then want to pour more energy into you.
It becomes a virtuous cycle.
And if you’re like, “my friends’ partners have high stress jobs and they aren’t like this!”…know that you may only see the highlight reel, and comparison is the thief of joy.
But if you’re still feeling totally unsatisfied with this kind of relationship, tell them you’re stopping out on the trade. They’ll get it.
This Week in the Markets
We’re helping you learn to read the financial news.
Week 1, we asked you to pick a financial news source (Bloomberg, WSJ, FT, CNBC, whatever), commit to reading at least 5 articles, writing down any words you didn’t know, and defining them in your own terms.
Here’s your assignment for Week 2:
Pick ONE PRODUCT.
It could be an individual stock like Tesla. It could be an index like the VIX. It could be an individual bond like 10-Year US Treasuries. It could be a commodity like oil or a currency pair like GBPUSD*.
*If you choose this one, we have a fun clip for you from “Industry” here for a little additional background:
Track the price of that product every day. Write down where it opened, the intraday high, the intraday low, and the closing price.
And that’s it!
We’ll be back next week with another assignment!