The Sharpe ratio measures a fund's return per unit of risk: excess return over the risk-free rate divided by the standard deviation of returns. A Sharpe above 1 is generally considered acceptable, above 2 strong, and above 3 exceptional and worth scrutinising.
Sharpe ratios let allocators compare strategies with different volatility. They are sensitive to the period measured, the return frequency and whether returns are net of fees, so comparisons should use the same basis. Very high Sharpe ratios over short periods often reflect a strategy that has not yet met its risk, such as a short-volatility trade.
Allocators read Sharpe alongside maximum drawdown, track-record length and the source of the return series.
Administrator-produced daily NAV series, such as those POD funds build, allow Sharpe and drawdown statistics to be calculated on verified data rather than self-reported returns. Past performance is not a reliable indicator of future results.
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