From the perspective of asset allocation for hedge funds, fund of funds, and family offices, let's take a look at Hyperliquid's LP pool - HLP as a product managed by a fund manager.
The article mentions:
(HLP) In addition, its risk-adjusted performance is strong, with a Sharpe ratio of 2.89 (in comparison, Bitcoin is 1.80), and it has a -9.6% negative correlation with Bitcoin.
What does a Sharpe ratio of 2.89 for HLP and 1.80 for BTC indicate?
> Looking solely at absolute returns, BTC is certainly higher, but in terms of return per unit of volatility, HLP has surpassed it, which can be understood as HLP having a steeper slope, theoretically producing a higher expected Alpha under the same risk budget.
> In the world of fund asset allocation, a Sharpe ratio greater than 1 is considered respectable, and greater than 2 is exceptionally rare.
> High Sharpe ratios can also be misleading; factors such as high leverage, a short data period, valuation smoothing, and return smoothing can produce falsely high Sharpe ratios, so it's essential to examine the data source and statistical range.
What does a -9.6% correlation indicate?
> -9.6%, or -0.096, is a slight negative correlation and does not indicate a strong inverse Beta.
> Generally, around -0.10 can be considered essentially uncorrelated, with a slight inverse tendency, limiting actual diversification effects, but when paired with high Sharpe strategies, the marginal efficiency of the portfolio can improve.
> Correlations between assets can change during macroeconomic conditions, liquidity shocks, and shifts in risk preference, and negative correlation premiums may evaporate instantly.
I found a five-year data reference for top hedge funds from 2017 to 2021.
> Well-known top quant hedge funds like Renaissance and Two Sigma have negative Sharpe ratios.
> Sharpe ratios greater than 2 are only found in Capula, Millennium, and DE Shaw, all of which share the common characteristic of being multi-strategy.
> Funds with high Sharpe ratios typically have low volatility.
> HLP achieved a Sharpe ratio of 2.89 in a single asset class and single strategy; Jeff Yan is a genius.
@chameleon_jeff In Initial D, the character Takumi often says: A genius is actually just a person who has accomplished what others cannot, thus becoming a genius.
Hyperliquid.
