Dennis Rodman Visits The FOX Business Network at FOX Studios on December 9 2014 in New York City. Picture: GETTY IMAGES/LAURA CAVANAUGH
Though he was a great player, a team full of Dennis Rodmans would have been terrible because he didn’t score enough. But when you add a Dennis Rodman, who was a great rebounder and defender, to four other players who can score, he makes them a lot better. He was a member of five championship teams, including the 72-win Chicago Bulls team of 1995-96 that is widely considered to be the best ever.
The Sharpe ratio measures returns normalised for the level of risk. The higher the ratio, the more attractive the risk-adjusted return. But it fails to capture other risk characteristics, notably negative convexity, which is the tendency for an asset price to go down faster than it goes up. Long-Term Capital Management had a very high Sharpe ratio right until it imploded, as did sub-prime collaterised debt obligations before they went bust.
Long volatility or tail-risk funds have a reputation of being money-losers and a drag on returns. But just as you wouldn’t have a team full of Dennis Rodmans, you wouldn’t have a portfolio that was strictly long volatility. Long volatility, or tail risk exposure, when added to a portfolio of stocks — and bonds — can greatly improve the risk characteristics while smoothing out returns.
Right. My Beagle is a Guru with stocks. This guy has ink poisoning maybe.
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