Here are the Sharpe trajectories of three popular asset classes over the previous decade.
Can you order the Sharpe ratios by looking at the graph?
Gold seems to have the most efficient path (Sharpe 0.53) while Treasuries the least (Sharpe 0.2) right?
The S&P 500 is somewhere in between with a Sharpe of 0.36.
A while back I outlined a strategy which quantifies portfolio return drivers (as I like to call them - 'ideas') and then weights portfolio holdings in order to equalise the contribution of each 'idea' in order to smooth returns.
Both Ideas and the equal weighted strategies beat out gold.
Ideas inches out Equal 0.76 to 0.68.
What accounts for the differences?
Both are equally inefficient during bad times.
But in good times 'Ideas' is consistently more efficient and generates less volatility.
So what we are seeing here is an evolution on equal weighting, which is consistently if only marginally more efficient.
Not barnstorming risk adjusted performance by any means, but if there was a way to push the envelope a bit more, we might be onto something.