Interpreting risk
On the short side, the markets do not cooperate. Market Darwinism dictates that short sellers become exceptional risk managers. In the coming sections, we will explore three vastly underrated risk metrics and their source code. Calibrate risk using any or all of them, and you may have a long-term fighting chance. When asked about risk, market participants usually do one of two things.
The first one is to roll out a battery of metrics. They start with the Sharpe ratio, add a measure of tracking error, spice it up with Sortino, a teaspoon of Treynor, a drop of Jensen Alpha to make it look good, apply the finishing touch with information ratio, and it is ready to serve to a bunch of incredulous clients, who pretend to love the number "haute-cuisine." The indiscriminate proliferation of metrics tells us one thing: we are hardwired to not understand risk.
The second thing market participants do is to drop into dissertation mode. They tell...
