I have even seen these convergent type strategies promote their strong Sharpe ratios. This is crazy as no one should use the Sharpe ratio as a measure for an option writer, or really any convergent type strategy.
Most disturbing, I believe, is that because it has become so fashionable to follow the Sharpe ratio, building a strong Sharpe ratio has gone into calculations in designing some strategies; i.e. ‘If I can produce a high Sharpe ratio I will be able to get these types of investments,’ the argument goes.
This is a backwards way of designing an investment approach. One example is Bernie Madoff. While Madoff was running a Ponzi scheme, his strategies were so popular because they produced tremendously high Sharpe ratios. He would seem to return between 1% and 2% every month for years on end. This was considered much better and safer than say a CTA who earned higher returns but had larger drawdowns and larger positive performance.
The flaws in the Sharpe ratio are well documented and there have been numerous attempts to correct them. The Sortino ratio offers a better measure of risk adjusted performance by eliminating the penalty on positive deviation but some confusion on how to actually calculate has developed over the years.
Obviously the details are a little more complicated; Rollinger and Hoffman describe the benefits of the Sortino ratio and correct some myths regarding it.