Matching Strategy Performance Measures to Return Distributions

Summary

The document asks whether mean-reverting and trend-following strategies call for different risk-adjusted performance measures. It begins with Sharpe and Sortino ratios as familiar examples, then suggests that the choice should depend on how the strategies’ return distributions differ rather than on their labels alone.

As an illustration, the response notes that research on short-option strategies may use a modified Sharpe ratio to account for negative skew. This points to a general evaluation principle: a metric should reflect the risks and shape of returns that matter for the strategy being assessed. The brief exchange does not recommend a specific measure for mean-reversion or trend-following, provide comparative evidence, or define a selection procedure. It therefore serves as a prompt to inspect distribution characteristics, not as a definitive ranking of performance metrics.

Key ideas

• A strategy label alone does not determine the most suitable performance measure.
• The return distribution can guide the choice of risk-adjusted metric.
• Negative skew can motivate modified measures for strategies such as short-option trading.
• The discussion does not establish which metric is best for mean-reverting or trend-following strategies.

Tags

# Are there better performance measures for mean-reverting vs trend-following trading strategies?


# Are there better performance measures for mean-reverting vs trend-following trading strategies?












The Sharpe ratio is often used as measure to assess risk-adjusted returns of trading strategies. However, there are also other measures that can be used to assess risk-adjusted returns like the Sortino ratio.

Are there performance measures that are better suited for mean-reverting strategies, and others that are better used for trend-following strategies?

## Answer by user42108 (score 2)

https://quant.stackexchange.com/a/61177

"Are there performance measures that are better suited for mean-reverting strategies, and others that are better used for trend-following strategies?"

Do you think the return distributions for these strategies differ? If so, then perhaps there are performance measures more appropriate for each. E.g. I have seen research that calculates a modified Sharpe ratio for short options strategies to take into account the negative skew of the return distribution.

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