Artemis Capital: Moneyball for Modern Portfolio Theory
Every year trillions of dollars in investment decisions are made based on a simple equation known as the Sharpe Ratio. In the investment industry, the Sharpe Ratio, first devised by then-32-year-old William Sharpe in his classic 1966 paper "Mutual Fund Performance," has become the dominant metric for portfolio construction.
In a groundbreaking research paper, Chris Cole, Founder & Chief Investment Officer at Artemis Capital Management uses the "Moneyball approach", that what matters in sports is whether a player helps the team win, to prove that what matters in investing is whether an asset improves the risk-adjusted returns of your total portfolio.
"Your goal shouldn't be to buy players. Your goal should be to buy wins. In order buy wins, you need to buy runs." - Peter Brand (aka. Paul DePodesta), Moneyball
In this study, Chris and the team at Artemis Capital Management have created a new measure for investment teams to use in their quantitative investment due diligence processes to replace the Sharpe Ratio:
COLE WINS ABOVE REPLACEMENT PORTFOLIO (CWARP)
CWARP is "wins over replacement" for the asset management industry. It is a one-stop number that assesses whether alternate investments improve or hurt the pre-existing portfolio, measuring return, risk, and maximum drawdown altogether.
In this webinar with Chris Cole, Founder & Chief Operating Officer at Artemis Capital we discussed:
The mechanics of CWARP and how was it established
How Allocators to Hedge Funds can apply this metric effectively to screen and monitor potential and existing hedge fund investments
The implications for investment teams who do not adopt their quantitative screening and investment monitoring processes to include CWARP