Moneyball For Modern Portfolio Theory

MONEYBALL FOR
MODERN PORTFOLIO THEORY

The Sharpe Ratio Problem and
Cole Wins Above Replacement Portfolio Solution
ALL RIGHTS RESERVED. IF YOU WISH TO REPRODUCE, REPRINT, OR COPY ANY PART OF THIS RESEARCH PAPER, YOU MUST REQUEST PERMISSION IN WRITING.
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MONEYBALL FOR MODERN PORTFOLIO THEORY 2
THE SHARPE RATIO PROBLEM

"What you measure is what you get. More likely, what you measure is all you'll get. What you don't measure is lost."
H. Thomas Johnson
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 formula, 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.
The first question a capital allocator will ask a new manager is, “What is
your Sharpe?”. For hedge fund managers, the Sharpe Ratio is equivalent
to a player’s scoring average in a sport. Sharpe Ratios are the primary
means by which managers are hired or fired, but are they effective? The
𝙍𝙥 – 𝙍𝙛
Sharpe Ratio =
true test of any new investment is whether it improves the return to risk 𝞼𝙥
of the portfolio. Oddly, the Sharpe Ratio is unserviceable for this end goal.
The Sharpe Ratio is more important for what it doesn’t measure than what where:
it does. Sharpe Ratios are not additive and ignore correlations, skew, and 𝙍𝙥 = return of portfolio
liquidity. For these reasons, a collection of high Sharpe Ratio investments 𝙍𝙛 = risk free rate
𝞼𝙥 = standard deviation of portfolio returns
can paradoxically lead to a more fragile portfolio with higher potential
losses in a crisis. The Sharpe Ratio is so widely misunderstood and
misused that it has become dangerous despite its ubiquity.
MONEYBALL FOR MODERN PORTFOLIO THEORY

"People who run ball clubs think in terms of buying players. Your goal shouldn’t be to buy players. Your goal is to buy wins."
Peter Brand (aka. Paul DePodesta), Moneyball
When your favorite sports team trades for a new player, what you care about is whether the player helps the team win, not the
individual player’s statistics or scoring averages. A player with gaudy statistics can sometimes hurt the unit; other times, a
player with less impressive personal numbers contributes significantly to team success. Likewise, in investing, what matters
is whether or not a new investment helps your portfolio “win” by improving the total risk-adjusted returns. When you pay
active manager fees, you are not “buying” the manager’s risk profile; you are buying the risk profile of your new diversified
portfolio. You pay for “wins.” Unfortunately, the Sharpe Ratio (and its variations) have little value in discerning that result.
In the early 2000s, the Oakland Athletics baseball team thrived against better-financed ballclubs by selecting players based
on widely overlooked statistics with a strong correlation to winning games. For example, players’ on-base percentages and
slugging percentages were more critical to predicting team success than standard metrics like RBIs, batting averages, or
bases stolen. In most cases, it was cheaper to acquire players who excelled in the overlooked metrics. Ballclubs were paying
exorbitant sums of money for players based on statistics that were not relevant to winning (1).
The investment industry is no different. The best portfolio is often not built from assets with the best Sharpe Ratios. Reliance
on this number has led to underdiversified, fragile portfolios. Meanwhile, investors ignore data that improve portfolio-level
returns like tail performance and correlations. The whole is not the sum of the parts.
The investment industry is stuck buying players, not buying wins. At best, the Sharpe Ratio and similar metrics have dubious
value, and at worst, they lead to sub-par decisions on a portfolio level. Sharpe Ratios encourage managers to pad their
“statistics” at the expense of total portfolio risk, most often by shorting convexity or leveraging beta. In professional sports,
this is akin to a player with excellent individual scoring statistics whose shortcomings in other areas hurt the team’s chances
of winning.
The sports industry has developed advanced metrics such as “wins above replacement value” that measure how much a
player will impact team success. Unfortunately, the investment industry has no easy-to-calculate metric for evaluating a
manager’s net effect on the total portfolio until now.
COLE WINS ABOVE REPLACEMENT PORTFOLIO (CWARP™)

What matters in sports is whether a player helps the team win. What matters in investing is whether an asset improves the
risk-adjusted returns of your total portfolio. CWARP is a metric devised by Artemis Capital Management that helps fiduciaries
quickly scan for investments to enhance the comprehensive portfolio.
CWARP is “wins above replacement” for the asset management industry. It is
a one-stop-score that assesses whether alternative investments improve or CWARP™ IS EASY TO USE
hurt the pre-existing portfolio, measuring return, risk, and maximum drawdown CWARP™>0
altogether. If an asset has a CWARP > 0, an allocator quickly knows it will improve ASSET IS IMPROVING YOUR PORTFOLIO
the portfolio’s risk-adjusted returns even without time-consuming optimizations. BY INCREASING:
CWARP quickly eliminates managers that “pad” performance with leveraged 1. Return to Downside Volatility;
2. Return to MAX Drawdown;
beta and concave returns. CWARP helps fiduciaries identify hidden alpha, true 3. Or BOTH.
diversifiers, and managers that increase a portfolio’s risk-adjusted returns.
CWARP™<0
This research paper will outline a new performance framework to evaluate ASSET HURTS YOUR PORTFOLIO
investments. First, we discuss the failures of the Sharpe Ratio. Next, we BY REPLICATING EXISTING EXPOSURES
consider CWARP vs. Sharpe Ratio for a wide variety of hedge fund strategies AND/OR INCREASING DRAWDOWNS
AND VOLATILITY.
and diversifiers. Lastly, we prove that portfolios constructed around high CWARP
assets outperform alternatives on a risk-adjusted basis.
Below is the mathematical formulation of CWARP. Herein, we will include an intuitive understanding of the score and links to
Python code that enable any investment firm to apply these methods immediately.
𝙎 𝙍𝙈𝘿𝘿𝙣
=[ ( 𝙎𝙥𝙣 ) × ( 𝙍𝙈𝘿𝘿𝙥
) –1 ] × 100
𝙍𝙥 – 𝙍𝙛
Sortino Ratio of Replacement Portfolio =
𝞼𝙙𝙥
(𝙍𝙥 – 𝙍𝙛)+ (𝙍𝙢 – 𝙍𝙛– 𝙍𝙘) × 𝟂
Sortino Ratio of New Portfolio =
𝞼𝙙𝙥𝙣
(𝙍𝙥 – 𝙍𝙛)
Return to Max Drawdown Replacement Portfolio =
(𝙇 𝙥 – 𝙋𝙥)
𝙋𝙥
(𝙍𝙥 – 𝙍𝙛)+ (𝙍𝙢 – 𝙍𝙛– 𝙍𝙘) × 𝟂
Return to Max Drawdown New Portfolio =
(𝙇 𝙣 – 𝙋𝙣)
𝙋𝙣
where:
Sp = Sortino Ratio of Replacement portfolio σdp = Downside Standard Deviation of Replacement Portfolio
Sn = Sortino Ratio of New Portfolio σdpn = Downside Standard Deviation of the New Portfolio
RMDDp = Annualized Return to Maximum Peak-to-Trough Drawdown of Replacement Portfolio Pp = Peak value of Replacement Portfolio
RMDDn = Annualized Return to Maximum Peak-to-Trough Drawdown of New Portfolio Pn = Peak value of New Portfolio
Rp = Return of Replacement Portfolio (e.g. S&P 500 index or 60/40 portfolio) Lp = Trough value of Replacement Portfolio
Rf = Risk Free Rate Ln = Trough value of New Portfolio
Rm = Return of Manager or Asset under consideration to add to portfolio ω = Asset Weight as % of Replacement Portfolio
Rc = Financing Charge
NOT VERY SHARPE

The Sharpe Ratio, contrary to its name, is a blunt tool when used for manager selection. Sharpe Ratios can have the
unintended consequence of herding capital allocators into less robust investments with inferior liquidity and diversification
benefits. A blind layering of high Sharpe Ratio investments results in more fragile portfolios with higher drawdown potential.
There are several fatal flaws with the Sharpe Ratio, as discussed in detail below.
SHARPE RATIOS ARE NOT ADDITIVE SHARPE RATIOS IGNORE CORRELATIONS & ARE NOT ADDITIVE
Sharpe A > Sharpe B > Sharpe C
Many investors fail to understand that the Sharpe Ratio is intended only 350
Portfolio A+C > Portfolio B+C > Portfolio A+B
for the entire portfolio and not individual components. Sharpe Ratios
300
are not additive, and combining two high Sharpe Ratio investments
does not guarantee a better portfolio. It is possible that between assets 250 Asset A
Asset Price
with three Sharpe Ratios where: Sharpe A > Sharpe B > Sharpe C , the best 200
portfolio is from the weaker of the two. Consider the following example:
150 Asset B
What combination of the three assets in the graph to the right results in
Asset C
the best portfolio? The first two assets have positive Sharpe Ratios but 100
are correlated (Asset A & Asset B). The third asset has a negative Sharpe 1 10 20 30 40
Ratio but is negatively correlated (Asset C). Counterintuitively, combining a Time
positive Sharpe Ratio asset (Asset A) with the non-correlated but negative
Sharpe Ratio asset (Asset C) results in the best risk-adjusted return. In PORTFOLIO A+C HAS HIGHER RETURNS WITH SUBSTANTIALLY
other words, anti-correlation and skew performance are worth more to the LOWER DRAWDOWNS AND VOLATILITY
300
portfolio than the excess return.
250
SHARPE RATIOS IGNORE SKEW AND CORRELATIONS Portfolio NAV Portfolio A+B
200
The Sharpe Ratio ignores the skewness of returns and correlations. As a
result, the metric penalizes anti-fragile alternatives and promotes brittle 150
Portfolio A+C
strategies with positive drift. At times allocations to high Sharpe Ratio
100
investments can double the max drawdown of the portfolio and vice versa.
Consider the probability distribution of two assets in the chart to the lower 1 10 20 30 40
right, one with a positive skew, and one with a negative skew. Contrary to Time
common sense, these assets have the exact Sharpe Ratio, although they
affect the portfolio in very different ways. SHARPE RATIOS DO NOT MEASURE ASSET SKEW
500
SHARPE RATIOS DO NOT MEASURE LIQUIDITY RISK Asset 1: 0.20 Sharpe / -.4 Skew
Asset 2: 0.20 Sharpe / +.4 Skew
The Sharpe Ratio exists in a theoretical world where there is no opportunity 400
cost to capital. Liquidity is more valuable at the end of a market crash when 300
Count
valuations are attractive. During these periods, excess capital is precious

but scarce. Sharpe Ratios incentivize illiquid investments, which can lock 200
up money for years and even demand cash injections in a crisis. Likewise, 100
a long volatility hedge fund that provides excess capital when markets are
crashing accrues no benefit over the illiquid investment, according to the -0.01 0.00 0.01 0.02 0.03
same blunt metrics. % Return
SHARPE RATIOS REWARD MANAGERS WHO “PAD” THEIR STATISTICS

The Sharpe Ratio artificially rewards managers who “pad” the statistic with leveraged exposure to beta and short convexity
exposure. Long-Term Capital Management had a Sharpe Ratio of 4.35x before imploding in 1998 (2). The VelocityShares Daily
Inverse VIX Short-Term exchange-traded note (XIV) had a rolling Sharpe Ratio of 1.78x before it imploded in February 2018.
Every crisis, a fund with a high trailing Sharpe Ratio implodes under stress.
BEYOND SHARPE
Unfortunately, the misuse of Sharpe Ratios is widespread, resulting in over-allocation to strategies that can sometimes harm
the portfolio. At the same time, many allocators toss away alpha-generating diversifiers with unimpressive Sharpe Ratios.
It is possible that a negative Sharpe Ratio asset can be beneficial to the total portfolio if it reduces max drawdowns and
downside volatility. It is time to move beyond Sharpe and focus on the total portfolio over the manager.
COLE WINS ABOVE REPLACEMENT PORTFOLIO

"Your goal shouldn’t be to buy players. Your goal should be to buy wins. To buy wins, you need to buys runs."
Peter Brand (aka. Paul DePodesta), Moneyball
Your goal shouldn’t be to buy assets. Your goal should be to buy the best portfolio.
To buy the best portfolio, you need to buy skew and non-correlation.
To design an alternative performance score for manager selection, Artemis took inspiration from the world of professional
sports. CWARP is “wins above replacement“ for the asset management industry. CWARP provides a simple score that
measures whether any investment will improve or hurt a pre-existing portfolio, measuring return, downside volatility, and
maximum drawdown altogether. CWARP investments > 0 increase the Sortino Ratio of your Portfolio, increase the Return to
Maximum Drawdown, or both. CWARP is an advanced but easy-to-calculate statistic that measures whether a new investment
improves a portfolio’s positioning on the Efficient Frontier. Unlike Sharpe Ratios, high CWARP assets are additive, providing a
convenient method for allocators to screen investments that improve the portfolio. The score offers similar insights derived
from complete portfolio optimization, but it is much easier to implement and observe from a tear sheet.
In summary: Higher Sharpe Ratios ensure managers get paid. Higher CWARP scores ensure your portfolio gets paid.
The logic behind CWARP is intuitive in that it answers a simple question: If you borrowed capital to allocate to an alternative
investment, does it help or hurt your aggregate portfolio's risk adjusted returns? What allocators will find is that many
managers with positive Sharpe Ratios may have negative CWARP scores and vice versa.
WHAT IS CWARP ™?
REPLACEMENT NEW CWARP™ CALCULATION
PORTFOLIO PORTFOLIO
Sortino Ratio: 1.50X 1.75X
Return to Drawdown: 0.15X 0.25X
1.75 0.25
[ ( 1.50
) ×( 0.15
) –1 ] × 100
40% Bonds 40% Bonds = +39.44 CWARP
60% Stocks 60% Stocks
+25% New Asset

Financed with Borrowed Capital
100% Cash Funded 100% Cash Funded

+25% Borrowed at Financing Rate (%)
CWARP™ CALCULATION IN WORDS

CWARP begins with the assumption an allocator has a pre-existing or replacement portfolio (60/40 Equity-Bond or Passive
Equity). The CWARP score first calculates the 1) Return to Downside Volatility and 2) Return to Maximum Drawdown of
the ”replacement” portfolio. CWARP assumes the allocator borrows cash to layer an alternative investment on top of the
replacement portfolio. CWARP recalculates the Return to Downside Volatility and Return to the Maximum Drawdown for
the revised portfolio. CWARP is then calculated by taking the geometric average of the ratios between the Sortino Ratio and
Return to Maximum Drawdown of the new and replacement portfolios.
The CWARP shares inputs with the Sharpe Ratio, including manager returns, volatility, and the risk-free rate. Several new
inputs include the returns of the replacement/base portfolio, financing rate, and the percentage allocation for the new
investment. The standardized CWARP score uses a 60/40 portfolio or Equity Beta as the replacement strategy and a 25%
weighting for the new asset. If an asset can be portfolio margined without added cash (e.g., derivative-overlays), it may be
appropriate to reduce financing charges to 0%.
CWARP measures how an investment improves your portfolio, and of course, the answer will change depending on the
starting portfolio. The replacement portfolio is simply the starting portfolio you wish to diversify. For example, you may
get different CWARP values for the same investment if you change your starting portfolio from Equities to U.S. Treasuries
or a 60/40 Portfolio. For most investors seeking diversification, a replacement portfolio comprised of risk assets (Equity
or 60/40) is most appropriate. However, if an investor is seeking an Equity replacement rather than diversification, a high-
quality fixed income portfolio may suffice. CWARP is flexible depending on the use-case of the allocator. As explained above,
standard CWARP assumes Equity Beta (S&P 500 Index, as below) or a 60/40 portfolio of Stocks and Bonds (Appendix I) as
the replacement portfolio. The user should match the periodicity of CWARP to the liquidity of the investment (e.g., private
equity at 6-month periodicity vs. long volatility at 1-day). Oddly, a portfolio can have a CWARP on itself, which measures
whether leveraging the existing asset composition (as the new portfolio) improves the risk-adjusted returns at prevailing
financing rates.
Replacement Portfolio = S&P 500 Index (Equity Beta) 2008 to 2020
INVESTMENT IDENTIFIER ADVANCED PORTFOLIO METRICS TRADITIONAL METRICS RANKINGS
RETURN/ SHARPE SORTINO RETURN CWARP SHARPE SORTINO RETURN/
ASSET BLOOMBERG ID CWARP SORTINO+
MAXDD+ RATIO RATIO TO MAXDD RANK RANK RANK MAXDD RANK
Eurekahedge CBOE Long Volatility HF Index EHFI451 Index +24.67 +21.84 +27.57 0.52x 1.37x 0.15x #1 #9 #4 #9
Gold XAU Curncy +21.87 +18.19 +25.66 0.44x 0.69x 0.15x #2 #10 #10 #10
Eurekahedge CBOE Relative Value Vol HF Index EHFI452 Index +16.07 +12.13 +20.16 1.40x 2.69x 0.83x #3 #1 #1 #1
HFRX Merger Arbitrage HF Index HFRXMAFS Index +11.62 +8.79 +14.52 1.19x 1.82x 0.51x #4 #2 #2 #3
Bloomberg Barclays U.S. Treasury Bond Index LUATTRUU Index +11.03 +10.77 +11.29 0.87x 1.71x 0.80x #5 #3 #3 #2
HFRX Macro Systematic Diversified CTA Index HFRXSDV Index +8.08 +5.16 +11.08 0.21x 0.34x 0.09x #6 #17 #17 #16
HFRX Fixed Income Credit HF Index HFRXFIC Index +3.49 +2.81 +4.17 0.74x 1.13x 0.28x #7 #4 #5 #5
HFRI Credit Arbitrage HF Index HFRICRED Index +1.85 +1.53 +2.17 0.67x 0.81x 0.20x #8 #5 #7 #7
HFRX World Index HFRIWRLD Index +1.43 +0.74 +2.12 0.64x 1.00x 0.30x #9 #6 #6 #4
HFRX Event Driven Special Situations HF Index HFRIEDSS Index +0.49 -0.62 +1.62 0.58x 0.80x 0.22x #10 #7 #8 #6
Eurekahedge CBOE Short Volatility HF Index EHFI450 Index -0.98 -4.36 +2.51 0.38x 0.48x 0.11x #11 #13 #14 #14
HFRX Fundamental Growth HF Index HFRXEHGF Index -1.14 -2.69 +0.43 0.40x 0.59x 0.16x #12 #12 #12 #8
S&P 500 Index (Leveraged) SPX Index -2.58 -3.09 -2.06 0.53x 0.76x 0.15x #13 #8 #9 #11
Eurekahedge CBOE Tail Risk HF Index EHFI453 Index -3.29 +0.77 -7.20 -0.15x -0.38x -0.05x #14 #26 #27 #26
HFRX Equity Hedge Index HFRXACT Index -3.98 -5.14 -2.81 0.42x 0.60x 0.14x #15 #11 #11 #12
HFRX Fundamental Value HF Index HFRXEHVF Index -5.15 -5.54 -4.77 0.35x 0.50x 0.11x #16 #14 #13 #13
HFRX Macro CTA HF Index HFRXM Index -5.57 -6.07 -5.08 -0.06x -0.09x -0.02x #17 #24 #24 #25
HFRX Special Situations HF Index HFRXSSFS Index -5.87 -6.06 -5.68 0.33x 0.42x 0.10x #18 #16 #16 #15
HFRI Fund of Funds Index HFRIFOF Index -6.05 -5.34 -6.75 0.35x 0.45x 0.08x #19 #15 #15 #17
HFRX Event Driven HF Index HFRXED Index -8.29 -7.67 -8.92 0.21x 0.27x 0.05x #20 #18 #18 #18
HFRX Absolute Return HF Index HFRXAR Index -9.67 -8.37 -10.96 -0.11x -0.13x -0.02x #21 #25 #25 #24
HFRX Equity Market Nuetral HF Index HFRXEMN Index -9.90 -9.36 -10.43 -0.28x -0.35x -0.06x #22 #27 #26 #27
HFRX Global HF Index HFRXGL Index -11.66 -10.49 -12.82 0.06x 0.07x 0.01x #23 #20 #20 #20
HFRX Relative Value Arbitrage HF Index HFRXRVA Index -13.07 -10.63 -15.45 0.09x 0.11x 0.01x #24 #19 #19 #19
HFRX Market Directional HF Index HFRXMD Index -14.64 -13.82 -15.45 0.05x 0.06x 0.00x #25 #21 #21 #21
HFRX Equity HF Index HFRXEH Index -14.88 -13.94 -15.80 0.02x 0.02x -0.01x #26 #22 #22 #22
HFRX RV Fixed Income Convert Arbitrage HF Index HFRXCA Index -20.29 -16.88 -23.56 0.01x 0.01x -0.01x #27 #23 #23 #23
HFRX Distressed/Restructuring HF Index HFRXDS Index -21.10 -18.19 -23.91 -0.33x -0.39x -0.06x #28 #29 #28 #28
HFRX Short Bias HF Index HFRXSB Index -27.03 -22.62 -31.19 -0.67x -0.81x -0.14x #29 #30 #30 #30
Bloomberg Commodity Index BCOM Index -36.05 -33.08 -38.90 -0.31x -0.40x -0.09x #30 #28 #29 #29
Sources: Artemis Capital Management LP, HFRX, Bloomberg
Notes: Overlay Weight = 25%, RF Rate = 1-month Tbill, Financing = 1m LIBOR+30bps, Periodicity = monthly
CWARP gives investment professionals actionable insights as to what alternatives improve their total portfolio. In the table
on the previous page, we present various hedge fund indices and diversifying assets ranked by their CWARP. In this example,
our replacement (prior) portfolio is the S&P 500 Index (Equity Beta), and we assume a mixing weight percentage of 25% for
each asset under consideration. For comparison, we provide traditional Sharpe Ratio, Sortino Ratio, and Maximum Drawdown
metrics and their respective rankings.
As can be seen, most alternative investment indices harm the risk-adjusted returns of an Equity portfolio and fail as
diversifiers. Only 33% of the alternatives surveyed improve the risk-adjusted returns of a portfolio comprised of Equity Beta,
and only 23% when used on a classic 60/40 portfolio (see Appendix I). Many of the best diversifying alternatives are not
ranked highly by Sharpe Ratios. Despite this fact, CWARP shows that hedge fund strategies like Long Volatility, Relative
Value Volatility, Merger Arbitrage, and Systematic CTAs add substantial value as diversifiers when merged with Equity Beta
or a 60/40 Portfolio. In addition, CWARP tells us traditional diversifiers like U.S. Treasury Bonds and Gold show benefits
alongside Equity Beta.
Twelve of the thirty diversifiers surveyed showed positive Sharpe Ratios with a negative CWARP. While these alternatives
offer positive risk-reward on a stand-alone basis, they decrease portfolio effectiveness when paired with Equity Beta (S&P
500 index). The S&P 500 Index ranked higher by CWARP score than seventeen hedge fund indices, meaning leveraging
Equity Beta was better for the portfolio than external allocations to those strategies. In the graph below, we show the additive
benefits of CWARP alternatives on the Efficient Frontier.
As a resource, Artemis has provided Python code to implement CWARP at the following GitHub repository (https://github.
com/jpartemis/cwarp).
THE EFFICIENT FRONTIER ACCORDING TO CWARP™

CWARP can help allocators
construct a better overall portfolio
EFFICIENT FRONTIER BY PERFORMANCE METRIC
ranking further out on the Efficient Replacement portfolio for CWARP = S&P 500 (Equity Beta) 2008 to 2020
Frontier. These results also show 8.5%
that, unlike Sharpe Ratios, high

CWARP assets prove additive to 8.0%
the total portfolio and each other.

The graph to the right shows the 7.5%
Efficient Frontier for portfolios

Return
constructed based on minimum 7.0%

CWARP > 15 @ 40% / SPX @ 60%
Sharpe Ratios and CWARP CWARP > 10 @ 40% / SPX @ 60%

CWARP > 5 @ 40% / SPX @ 60%
6.5%
thresholds from the indices on SHARPE R > 0.70x @ 40% / SPX @ 60%
SHARPE R > 0.50x @ 40% / SPX @ 60%
the previous page. Each portfolio SHARPE R > 0.30x @ 40% / SPX @ 60%
6.0% UST BONDS @ 40% / SPX @ 60%
assumes a 60% exposure to the S&P 500 INDEX
RISK PARITY INDEX
S&P 500 Index, and the remaining 5.5%
40% of the portfolio comprises 8% 9% 10% 11% 12% 13% 14% 15% 16% 17%
diversifiers that meet minimum Risk (Volatility)

threshold targets for the target
performance metric.
PORTFOLIO CWARP > 15 @ CWARP > 10 @ CWARP > 5 @ RISK PARITY UST BONDS @ SHARPE R > 0.70x SHARPE R > 0.50x SHARPE R > 0.30x S&P 500
40% / SPX @ 40% / SPX @ 40% / SPX @ INDEX 40% / SPX @ @ 40% / SPX @ @ 40% / SPX @ @ 40% / SPX @ INDEX
60% 60% 60% 60% 60% 60% 60%
SELECTION CRITERIA CWARP CWARP CWARP RISK PARITY 60/40 SHARPE RATIO SHARPE RATIO SHARPE RATIO BETA
RETURN 6.86% 7.22% 6.98% 7.98% 6.33% 6.71% 6.71% 6.62% 7.49%
VOLATILITY 8.44% 9.70% 9.55% 10.89% 9.16% 10.16% 10.82% 11.24% 15.97%
SHARPE RATIO 0.77x 0.72x 0.70x 0.72x 0.66x 0.64x 0.61x 0.58x 0.50x
SORTINO RATIO 1.22x 1.12x 1.09x 1.01x 0.99x 0.95x 0.90x 0.85x 0.72x
MAX DRAWDOWN -21.66% -26.56% -26.89% -31.16% -30.68% -30.74% -33.85% -35.10% -49.94%
RISK RETURN RANK #1 #2 #3 #4 #5 #6 #7 #8 #9
Notes: Overlay Weight = 25%, RF Rate = 1-month Tbill, Financing = 1m LIBOR + 30bps, average rates over holding period applied, Periodicity = monthly
The risk-return of a classic 60/40 Stock-Bond portfolio and Risk Parity Portfolio (SPX RP Index 10 Vol) are provided for
comparison as well. As demonstrated, when used as the primary selection criteria for alternatives, CWARP results in higher
aggregate portfolio Return to Volatility, Return to Downside Volatility, and Return to Max Drawdown than portfolios selected
based on Sharpe Ratios or other methods.
A portfolio of Equity Beta that layers high CWARP assets (like the Eurekahedge CBOE Long Volatility HF Index and Gold)
substantially outperforms a portfolio comprised of high Sharpe Ratio assets, Risk Parity, and the classic 60/40 Stock-Bond
portfolio. CWARP is a superior methodology to screen investments for total portfolio results, whether you seek diversification
for Equity Beta or a traditional 60/40 allocation.
PORTFOLIO GROWTH BY PERFORMANCE METRIC

Replacement portfolio for CWARP = S&P 500 Index (Equity Beta)
2008 to 2020 / Volatility Normalized @10%
2.4
2.4
GROWTH OF $1
Growth of 1$
CWARP > 15 @ 40% / SPX @ 60%

1.21.2 CWARP > 15 @ 40% / SPX
CWARP > 10@ 60%
@ 40% / SPX @ 60%
CWARP > 10 @ 40% / SPX
CWARP >5@ @40%60%/ SPX @ 60%
CWARP > 5 @ 40% SHARPE
/ SPXR@ 60%@ 40% / SPX @ 60%
> 0.70x
SHARPE R > .70x @ 40% R/ >SPX
SHARPE 0.50x @
@ 40%60%/ SPX @ 60%
SHARPE R > .50x @SHARPE
40% R/ >SPX
0.30x @
@ 40%60%/ SPX @ 60%
SHARPE R > 0.30x UST BONDS/@
@ 40% 40% /@
SPX SPX60%
@ 60%
S&P 500 INDEX
UST Bonds @ 40% / SPX @ 60%
RISK PARITY INDEX
0.60.6 S&P 500 INDEX
S-11
S-16
M-08
M-09
M-13
M-14
M-18
M-19
N-10
N-15
N-20
J-10
J-10
J-12
J-15
J-15
J-17
J-20
J-20
A-09
A-11
A-14
A-16
A-19
D-07
D-12
D-17
F-12
F-17
O-08
O-13
O-18
D-07
A-08
A-08
D-08
A-09
A-09
D-09
A-10
A-10
D-10
A-11
A-11
D-11
A-12
A-12
D-12
A-13
A-13
D-13
A-14
A-14
D-14
A-15
A-15
D-15
A-16
A-16
D-16
A-17
A-17
D-17
A-18
A-18
D-18
A-19
A-19
D-19
A-20
A-20
D-20
DATE
Date
CWARP™ CASE STUDY: SHORT VOLATILITY

The most convincing examples of the benefits of CWARP come from applying it ex-ante to investments or funds that
eventually failed. In February 2018, the VelocityShares Daily Inverse VIX Short Term ETN (XIV) collapsed dramatically, losing
-99% of its value due to overexposure to risk. Before the collapse, XIV was popular with investors and, from 2010 to January
2018, had a stunning Sharpe Ratio of 1.78x. A naïve combination of the S&P 500 Index and XIV at 25% exposure resulted
in a higher Sharpe Ratio and nearly doubled the annualized return. Sharpe Ratios indicated that XIV was a solid ex-ante
investment, but CWARP would have flashed warning signs. From 2010 to January 2018, XIV had a subpar CWARP of -4.19.
The poor CWARP for XIV came from a 0.83 correlation to SPX, which doubled the maximum drawdown of the aggregated
portfolio. A capital allocator using CWARP, otherwise knowing nothing about the XIV strategy, would have filtered out the
product before its implosion.
CWARP™ AND THE 100 YEAR PORTFOLIO (DRAGON PORTFOLIO ™)

Many readers of our research may notice the inadvertent similarity between high CWARP assets surveyed and the diversifying
portfolio recommended in our paper "The Allegory of the Hawk and Serpent: How to Build and Preserve Wealth for 100-Years"
(called the Dragon Portfolio™). Our research paper rigorously recreated and tested a wide range of investment and financial
engineering strategies over 93 years to determine the optimal portfolio allocation. The conclusion held that a portfolio
composed of U.S. Domestic Equity, U.S. Treasury Bonds, Gold, Active Long Volatility, and Commodity Trend Following
strategies outperformed traditional 60/40 Stock to Bond, Risk Parity, and Target Volatility Portfolios on a risk-adjusted basis.
The four constituents of this portfolio (outside Equity) had an average CWARP of +16.41 using the S&P 500 Index as the base
portfolio. The four constituents include the Bloomberg Barclays U.S. Treasury Bond Index (+11.03 CWARP), Eurekahedge
CBOE Long Volatility Hedge Fund Index (+24.67 CWARP), Gold (+21.87 CWARP), HFRX Systematic CTA Hedge Fund Index
(+8.08 CWARP).
It is not a coincidence that the brute force technique of long-term backtesting agrees with a more elegant mathematical
derivation of CWARP. Each asset in the recommended portfolio had two things in common: 1) non-linear returns on the
tails of the equity return distribution; 2) non-correlation to equities. For example, Active Long Volatility shows non-linear
performance in the left tail of the distribution and strong anti-correlation. Gold has extreme right tails and non-correlation
to equity and fixed income. These diversification attributes improve the risk-adjusted returns of the portfolio. CWARP helps
allocators uncover portfolio diversification benefits quickly and without the need to implement costly and time-consuming
backtesting.
GOODHART'S LAW (3)
"When a measure becomes a target, it ceases to be a good measure."
The often-cited example of Goodhart's law is when the ruling British put a bounty on cobras in an ill-fated attempt to reduce
the number of dangerous snakes in India. Instead, resourceful people began to raise snakes in their homes to later kill and
present to the British for extra money. Instead of reducing risk, there were more deadly snakes on the streets than ever
before (4).
The Sharpe Ratio is no different, but instead of raising deadly snakes, allocators are unintentionally incentivizing active
managers to pursue risk premia correlated to equities and short both tails of the return distribution. The net effect of this
misalignment of performance targets is more fragile portfolios with harmful exposure to deflationary and stagflation shocks.
There is no doubt that some of the industry-wide rejection of active management in favor of passive is due, in part, to the fact
that investors are incentivizing and paying for the wrong kind of active exposure.
For the fiduciary with a portfolio comprised primarily of Equity and Bonds, the only active-managed strategies worth paying
for are those that provide non-correlation and non-linear exposure to the tails of the return distribution. The performance
metrics widely used by the industry incentivize the exact opposite behavior by managers. The asset management industry
is obsessed with a 60-year-old performance metric that leads to faulty conclusions on diversifying investments. It is time to
move on from the Sharpe Ratio and embrace metrics like CWARP that reward active managers for providing exposure that
benefits the end portfolio.
THE UNINTENDED CONSEQUENCES OF POOR ASSET SELECTION

The Sharpe Ratio problem is now a social problem. According to Wilshire Associates, U.S. State and Local Pension systems
reached an all-time low 62.6% funding ratio in March 2020 (5). While the funding ratio rebounded to 78.6% by the end of
December, it does not bode well that the asset composition of many retirement programs is not resilient to market price or
inflation shocks. The long-term unintended consequence of the Sharpe Ratio problem is the perpetual monetary and fiscal
bailouts of markets due to "too-big-to-fail" pension programs. The ultimate victims are portfolio beneficiaries and the middle-
class taxpayer.
The investment management industry should take inspiration from sports and measure the wins, not the individual players.
In other words, capital allocators should target metrics like CWARP to measure how alternatives contribute to risk-adjusted
portfolio returns rather than manager success at the expense of their beneficiaries.
CWARP™ SOLUTION
CWARP provides a powerful solution for allocators to quickly identify diversifiers that help build anti-fragile portfolios with
better risk-adjusted-performance. We encourage readers to visit the websites below for tools to help implement CWARP in
your asset management practice.
• Artemis Github Repository including CWARP Code in Python and examples
• Artemis Research
APPENDIX I
CWARP™ Scores
Classic 60% Equity / 40% Fixed Income Portfolio

Replacement Portfolio = 60% S&P 500 Index / 40% U.S. Treasury Bonds 2008 to 2020
INVESTMENT IDENTIFIER ADVANCED PORTFOLIO METRICS TRADITIONAL METRICS RANKINGS

RETURN/ SHARPE SORTINO RETURN CWARP SHARPE SORTINO RETURN/
ASSET BLOOMBERG ID CWARP SORTINO+
MAXDD+ RATIO RATIO TO MAXDD RANK RANK RANK MAXDD RANK
Eurekahedge CBOE Long Volatility HF Index EHFI451 Index +38.32 +29.76 +47.43 0.52x 1.37x 0.15x #1 #9 #4 #10
Gold XAU Curncy +23.10 +13.22 +33.84 0.44x 0.69x 0.15x #2 #10 #10 #11
Eurekahedge CBOE Relative Value Vol HF Index EHFI452 Index +22.64 +15.21 +30.56 1.40x 2.69x 0.83x #3 #1 #1 #1
HFRX Merger Arbitrage HF Index HFRXMAFS Index +13.95 +9.38 +18.71 1.19x 1.82x 0.51x #4 #2 #2 #3
Bloomberg Barclays U.S. Treasury Bond Index LUATTRUU Index +13.39 +12.85 +13.93 0.87x 1.71x 0.80x #5 #3 #3 #2
HFRX Macro Systematic Diversified CTA Index HFRXSDV Index +11.36 +4.71 +18.42 0.21x 0.34x 0.09x #6 #17 #17 #16
HFRX Fixed Income Credit HF Index HFRXFIC Index +1.56 +1.03 +2.09 0.74x 1.13x 0.28x #7 #4 #5 #5
HFRX World Index HFRIWRLD Index -0.77 -1.86 +0.32 0.64x 1.00x 0.30x #8 #7 #7 #4
HFRI Credit Arbitrage HF Index HFRICRED Index -2.83 -2.58 -3.09 0.67x 0.81x 0.20x #9 #6 #8 #8
Classic 60/40 Stock-Bond Portfolio (Leveraged) n/a -3.91 -4.17 -3.64 0.71x 1.07x 0.20x #10 #5 #6 #7
HFRX Event Driven Special Situations HF Index HFRIEDSS Index -4.05 -5.45 -2.64 0.58x 0.80x 0.22x #11 #8 #9 #6
Eurekahedge CBOE Short Volatility HF Index EHFI450 Index -4.77 -11.05 +1.94 0.38x 0.48x 0.11x #12 #13 #14 #14
Eurekahedge CBOE Tail Risk HF Index EHFI453 Index -5.36 -1.63 -8.94 -0.15x -0.38x -0.05x #13 #26 #27 #26
HFRX Fundamental Growth HF Index HFRXEHGF Index -5.80 -8.59 -2.93 0.40x 0.59x 0.16x #14 #12 #12 #9
HFRX Macro CTA HF Index HFRXM Index -7.56 -9.89 -5.17 -0.06x -0.09x -0.02x #15 #24 #24 #25
HFRX Fundamental Value HF Index HFRXEHVF Index -10.59 -11.62 -9.54 0.35x 0.50x 0.11x #16 #14 #13 #13
HFRI Fund of Funds Index HFRIFOF Index -11.20 -10.00 -12.39 0.35x 0.45x 0.08x #17 #15 #15 #17
HFRX Equity Hedge Index HFRXACT Index -11.69 -13.56 -9.77 0.42x 0.60x 0.14x #18 #11 #11 #12
HFRX Special Situations HF Index HFRXSSFS Index -11.81 -12.43 -11.18 0.33x 0.42x 0.10x #19 #16 #16 #15
HFRX Equity Market Nuetral HF Index HFRXEMN Index -13.14 -13.01 -13.28 -0.28x -0.35x -0.06x #20 #27 #26 #27
HFRX Event Driven HF Index HFRXED Index -13.98 -13.39 -14.58 0.21x 0.27x 0.05x #21 #18 #18 #18
HFRX Absolute Return HF Index HFRXAR Index -14.28 -12.53 -15.99 -0.11x -0.13x -0.02x #22 #25 #25 #24
HFRX Global HF Index HFRXGL Index -17.99 -16.75 -19.21 0.06x 0.07x 0.01x #23 #20 #20 #20
HFRX Relative Value Arbitrage HF Index HFRXRVA Index -20.88 -17.30 -24.31 0.09x 0.11x 0.01x #24 #19 #19 #19
HFRX Equity HF Index HFRXEH Index -22.15 -21.73 -22.56 0.02x 0.02x -0.01x #25 #22 #22 #22
HFRX Market Directional HF Index HFRXMD Index -22.23 -22.07 -22.40 0.05x 0.06x 0.00x #26 #21 #21 #21
HFRX Distressed/Restructuring HF Index HFRXDS Index -29.53 -26.10 -32.80 -0.33x -0.39x -0.06x #27 #29 #28 #28
HFRX Short Bias HF Index HFRXSB Index -30.98 -26.17 -35.48 -0.67x -0.81x -0.14x #28 #30 #30 #30
HFRX RV Fixed Income Convert Arbitrage HF Index HFRXCA Index -31.27 -27.47 -34.88 0.01x 0.01x -0.01x #29 #23 #23 #23
Bloomberg Commodity Index BCOM Index -47.65 -46.18 -49.08 -0.31x -0.40x -0.09x #30 #28 #29 #29

Notes: Overlay Weight = 25%, RF Rate = 1-month Tbill, Financing = 1m LIBOR+30bps, Periodicity = monthly
EFFICIENT FRONTIER BY PERFORMANCE METRIC

Replacement portfolio for CWARP = 60% S&P 500 Index / 40% U.S. Treasury Bonds 2008 to 2020
8.5%
8.0%
7.5%
7.0%
Return
6.5%
6.0%
CWARP > 15 @ 40% / 60-40 Portfolio @ 60%
CWARP > 10 @ 40% / 60-40 Portfolio @ 60%
5.5% CWARP > 0 @ 40% / 60-40 Portfolio @ 60%
SHARPE R > 0.70x @ 40% / 60-40 Portfolio @ 60%
5.0%
UST BONDS @ 40% / SPX @ 60%
4.5%
S&P 500 INDEX
RISK PARITY INDEX
4.0%
5% 7% 9% 11% 13% 15% 17% 19%
Risk (Volatility)
PORTFOLIO CWARP > 15 @ CWARP > 7.5 @ CWARP > 0 @ RISK PARITY UST BONDS @ SHARPE R > 0.70x SHARPE R > 0.50x SHARPE R > 0.30x S&P 500
40% / 60-40 40% / 60-40 40% / 60-40 INDEX 40% / SPX @ @ 40% / 60-40 @ 40% / 60-40 @ 40% / 60-40 INDEX
Portfolio @ 60% Portfolio @ 60% Portfolio @ 60% 60% Portfolio @ 60% Portfolio @ 60% Portfolio @ 60%
SELECTION CRITERIA CWARP CWARP CWARP RISK PARITY 60/40 SHARPE RATIO SHARPE RATIO SHARPE RATIO BETA
RETURN 5.81% 5.93% 5.94% 7.98% 6.33% 5.77% 5.76% 5.70% 7.49%
VOLATILITY 5.16% 5.71% 5.73% 10.89% 9.16% 6.14% 6.64% 7.09% 15.97%
SHARPE RATIO 1.02x 0.95x 0.95x 0.72x 0.66x 0.86x 0.80x 0.75x 0.50x
SORTINO RATIO 1.76x 1.58x 1.58x 1.01x 0.99x 1.36x 1.24x 1.14x 0.72x
MAX DRAWDOWN -9.01% -12.66% -12.76% -31.16% -30.68% -16.75% -19.72% -21.28% -49.94%
RISK RETURN RANK #1 #2 #3 #7 #8 #4 #5 #6 #9
Notes: Overlay Weight = 25%, RF Rate = 1-month Tbill, Financing = 1m LIBOR + 30bps, average rates over holding period applied, Periodicity = monthly
PORTFOLIO GROWTH BY PERFORMANCE METRIC

Replacement portfolio for CWARP = 60% S&P 500 Index / 40% US Treasury Bonds
2.4 2008 to 2020 / Volatility Normalized @10%
2.4
GROWTH OF $1
Growth of 1$
1.21.2 CWARP > 15 @ 40% / SPX @ 60%

CWARP > 15 @ 40% / 60-40 Portfolio @ 60%
CWARP > 10 @ 40%
CWARP/>SPX @ 60%
10 @ 40% / 60-40 Portfolio @ 60%
CWARP > 5 @ 40% / SPX
CWARP @ 60%
> 0 @ 40% / 60-40 Portfolio @ 60%
SHARPE R > .70x @ 40%
SHARPE / SPX
R > 0.70x @ 40%@ /60%
60-40 Portfolio @ 60%
SHARPE
SHARPE R > .50x @ 40%R > 0.50x
/ SPX@ 40%@ /60%
60-40 Portfolio @ 60%
SHARPE R > 0.30x @ 40% / SPX @ 60%
UST BONDS @ 40% / SPX @ 60%
UST Bonds @ 40% / SPX
S&P 500 INDEX@ 60%
0.6 S&P 500 INDEX RISK PARITY INDEX
0.6
S-11
S-16
M-08
M-09
M-13
M-14
M-18
M-19
N-10
N-15
N-20
J-10
J-10
J-12
J-15
J-15
J-17
J-20
J-20
A-09
A-11
A-14
A-16
A-19
D-07
D-12
D-17
F-12
F-17
O-08
O-13
O-18
D-07
A-08
A-08
D-08
A-09
A-09
D-09
A-10
A-10
D-10
A-11
A-11
D-11
A-12
A-12
D-12
A-13
A-13
D-13
A-14
A-14
D-14
A-15
A-15
D-15
A-16
A-16
D-16
A-17
A-17
D-17
A-18
A-18
D-18
A-19
A-19
D-19
A-20
A-20
D-20
DATE
Date
APPENDIX II
CALCULATION METHODOLOGY
In academic literature and across professional applications there is widespread disagreement over the proper calculation
methodology for the Sharpe, Sortino, and Return to Max Drawdown Ratios. The most common methodology used by
most professionals is the arithmetic mean and standard deviation of returns by period multiplied by the square root of the
periodicity. Many others will point out that using logarithmic returns is more appropriate, or alternatively using geometric
returns in the numerator(e.g. Geometric Sharpe Ratio). In some cases, the volatility calculation will take into account the
subtraction of the risk-free rate, and in other cases, this is only applied to the numerator.
For the benefit of the doubt, Artemis uses the most common methodology to calculate Sharpe and Sortino Ratios with
arithmetic mean and standard deviations. In each respective case, we only subtract the risk-free rate from the numerator.
Sortino Ratios are derived by zeroing out positive returns from the standard deviation calculation, as opposed to excluding
them entirely. For the Return to Max Drawdown calculation, we assume the compound annualized growth rate of the asset
minus the risk-free rate in the numerator. The maximum drawdown does not take into account the subtraction of the risk-free
rate. The risk-free rate and the financing charges are applied by month to each respective return period. In the python code,
a consistent risk-free rate and financing charge is applied to the numerator, as opposed to a variable monthly rate.
While calculation methodology will numerically affect each metric slightly, and by proxy the CWARP score, they will not lead
to radically different conclusions regarding the relative rankings of assets so long as there is consistency in the technique
applied.
If you prefer a different methodology, please feel free to edit the accompanying code to fit your preferences.
APPENDIX III
Programming and Quantitative Reference Materials
GITHUB REPOSITORY WITH CWARP™ IMPLEMENTATION CODE

At the link below, we provide Python notebooks that will allow any practitioner to implement the CWARP calculation. Please
feel free to use the code in your investment practice, made available free for public use.
• https://github.com/jpartemis/cwarp
CITATIONS
Lewis, Michael, "Moneyball: The Art of Winning an Unfair Game". W.W. Norton & Company, 2004.
(1)
Lux, Hal; (October 2002) "Risk Gets Riskier". Institutional Investor.

(2)
Strathern, Marilyn (1997). "'Improving ratings': audit in the British University system". European Review. John Wiley &
(3)
Sons. 5 (3): 305–32.

Siebert, Horst (2001). Der Kobra-Effekt. Wie man Irrwege der Wirtschaftspolitik vermeidet (in German). Munich: Deutsche
(4)
Verlags-Anstalt. ISBN 3-421-05562-9.

Comtois, James (April 2020) "Funding ratio for state plans lowest in 30 years – Wilshire" Pensions & Investments.
(5)
REFERENCES
• Lewis, Michael, "Moneyball: The Art of Winning an Unfair Game". W.W. Norton & Company, 2004.
• Sharpe, William F. (1966), "Mutual Fund Performance". The Journal of Business, Vol. 39, No. 1, Part 2: Supplement on
Security Prices.
• Sharpe, William F. (1963), "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk", The Journal of
Finance, Vol. 19, No. 3.
• Sharpe, William F. (1994). "The Sharpe Ratio". The Journal of Portfolio Management. 21 (1): 49–58.
• Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance. 7 (1): 77–91.
• Sortino, F.A.; Price, L.N. (1994). "Performance measurement in a downside risk framework". Journal of Investing.
• Young, Terry W. (October 1991), "Calmar Ratio: A Smoother Tool". Futures.
• Cole, Christopher (2020). "Allegory of the Hawk and Serpent: How to Grow and Protect Wealth for 100-Years). Artemis
Capital Management, https://docsend.com/view/taygkbn.
DISCLAIMER
THIS RESEARCH PAPER IS BEING PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
IN ANY WAY AS A SOLICITATION FOR ANY ARTEMIS FUND, STRATEGY, OR INVESTMENT PRODUCT. NONE OF THE DATA
PRESENTED IN THIS PAPER REPRESENTS REAL OR HYPOTHETICAL RETURNS ACHIEVED BY ANY STRATEGIES OR
INVESTMENT VEHICLES OF ARTEMIS CAPITAL MANAGEMENT LP, ARTEMIS CAPITAL ADVISERS LP, OR ITS AFFILIATES.
THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO PURCHASE AN INTEREST IN ANY STRATEGIES
OR INVESTMENT VEHICLES OF ARTEMIS CAPITAL MANAGEMENT LP OR ARTEMIS CAPITAL ADVISERS LP. ANY SUCH
OFFER OR SOLICITATION WILL ONLY BE MADE TO QUALIFIED INVESTORS BY MEANS OF A CONFIDENTIAL PRIVATE
PLACEMENT MEMORANDUM (THE "MEMORANDUM") AND ONLY IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW.
AN INVESTMENT SHOULD ONLY BE MADE AFTER CAREFUL REVIEW OF A FUND'S MEMORANDUM. AN INVESTMENT IN A
FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. OPPORTUNITIES FOR WITHDRAWAL, REDEMPTION, AND
TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE ACCESS TO CAPITAL WHEN IT IS
NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS, AND NONE IS EXPECTED TO DEVELOP. NO ASSURANCE
CAN BE GIVEN THAT THE INVESTMENT OBJECTIVE WILL BE ACHIEVED OR THAT AN INVESTOR WILL RECEIVE A RETURN
OF ALL OR ANY PORTION OF HIS OR HER INVESTMENT IN A FUND. INVESTMENT RESULTS MAY VARY SUBSTANTIALLY
OVER ANY GIVEN TIME PERIOD. CERTAIN DATA CONTAINED HEREIN IS BASED ON INFORMATION OBTAINED FROM
SOURCES BELIEVED TO BE ACCURATE, BUT WE CANNOT GUARANTEE THE ACCURACY OF SUCH INFORMATION.
ANY AND ALL CONTENTS OF THIS RESEARCH PAPER ARE FOR INFORMATIONAL PURPOSES ONLY. NEITHER THE
INFORMATION PROVIDED HEREIN NOR THE PROGRAMMING AND QUANTITATIVE REFERENCE MATERIALS PROVIDED
IN APPENDIX II SHOULD BE CONSTRUED AS A GUARANTEE OF ANY PORTFOLIO PERFORMANCE USING CWARP OR ANY
OTHER METRIC DEVELOPED OR DISCUSSED HEREIN. ANY INDIVIDUAL WHO USES, REFERENCES OR OTHERWISE ACCESSES
THIS PAPER, THE GITHUB REPOSITORY, THE WEB-APP FOR CWARP EXPERIMENTATION OR ANY OTHER DATA, THEORY,
FORMULA, OR ANY OTHER INFORMATION CREATED, USED, OR REFERENCED BY ARTEMIS DOES SO AT THEIR OWN RISK
AND, BY ACCESSING ANY SUCH INFORMATION, INDEMNIFIES AND HOLDS HARMLESS ARTEMIS CAPITAL MANAGEMENT
LP, ARTEMIS CAPITAL ADVISERS LP, AND ALL OF ITS AFFILIATES (TOGETHER, "ARTEMIS") AGAINST ANY LOSS OF CAPITAL
THEY MAY OR MAY NOT INCUR BY UTILIZING SUCH DATA. ARTEMIS DOES NOT BEAR ANY RESPONSIBILITY FOR THE
OUTCOME OF ANY PORTFOLIO NOT DIRECTLY OWNED AND/OR MANAGED BY ARTEMIS.

Moneyball For Modern Portfolio Theory - The Sharpe Ratio Problem and Cole Wins Above Replacement Portfolio Solution

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MONEYBALL FOR

MODERN PORTFOLIO THEORY

THE SHARPE RATIO PROBLEM

COLE WINS ABOVE REPLACEMENT PORTFOLIO (CWARP™)

COLE WINS ABOVE REPLACEMENT PORTFOLIO (CWARP™)

NOT VERY SHARPE

valuations are attractive. During these periods, excess capital is precious

same blunt metrics. % Return

SHARPE RATIOS REWARD MANAGERS WHO “PAD” THEIR STATISTICS

COLE WINS ABOVE REPLACEMENT PORTFOLIO

60% Stocks 60% Stocks

+25% New Asset

100% Cash Funded 100% Cash Funded

CWARP™ CALCULATION IN WORDS

THE EFFICIENT FRONTIER ACCORDING TO CWARP™

that, unlike Sharpe Ratios, high

the total portfolio and each other.

Efficient Frontier for portfolios

constructed based on minimum 7.0%

Sharpe Ratios and CWARP CWARP > 10 @ 40% / SPX @ 60%

diversifiers that meet minimum Risk (Volatility)

PORTFOLIO GROWTH BY PERFORMANCE METRIC

CWARP > 15 @ 40% / SPX @ 60%

CWARP™ CASE STUDY: SHORT VOLATILITY

CWARP™ AND THE 100 YEAR PORTFOLIO (DRAGON PORTFOLIO ™)

THE UNINTENDED CONSEQUENCES OF POOR ASSET SELECTION

COLE WINS ABOVE REPLACEMENT PORTFOLIO (CWARP™)

INVESTMENT IDENTIFIER ADVANCED PORTFOLIO METRICS TRADITIONAL METRICS RANKINGS

Sources: Artemis Capital Management LP, HFRX, Bloomberg

EFFICIENT FRONTIER BY PERFORMANCE METRIC

5% 7% 9% 11% 13% 15% 17% 19%

PORTFOLIO GROWTH BY PERFORMANCE METRIC

1.21.2 CWARP > 15 @ 40% / SPX @ 60%

GITHUB REPOSITORY WITH CWARP™ IMPLEMENTATION CODE

Lux, Hal; (October 2002) "Risk Gets Riskier". Institutional Investor.

Sons. 5 (3): 305–32.

Verlags-Anstalt. ISBN 3-421-05562-9.

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