Where Are the Sharpe Returns Now?

Post-Lehman Brothers, European high yield might have seemed a risky bet for some, but investors could now be happy about taking it.

(October 14, 2013) — If you have held European high-yield debt over the last five years, you might be sitting pretty—the asset class has made some good returns, but crucially, these have had well-adjusted risk profiles too.

The quarterly “Risk-Adjusted Return” note from consultants Redington has shown that relatively risky debt from Europe returned a cumulative 13.7% return in the five years to the end of September (the highest of any mainstream asset class). The risk for holding the debt over a fairly tumultuous period was amply rewarded too, with the asset class clocking up a 0.86 Sharpe Ratio—second only to US high yield, which had a slightly lower overall return.

Emerging markets hard currency rewarded investors with a 9.3% return and 0.83 Sharpe Ratio, whereas risk parity strategies fell below UK government bonds on a risk-adjusted return basis—0.63 vs 0.73—but outperformed in terms of excess returns—7.2% vs 4.6%.

Investors in commodities may be hoping that the long game pays off. Those who have held a general basket of these supposedly essential items would have seen cumulative losses of 5.9% over the last five years. However, the last quarter has been kind, lifting losses from a cumulative 12.5% at the end of June.

Macro hedge funds have done little better with a loss of 3.9% over the five years to the end of September.

To see the full report—including one and three-year returns and associated Sharpe Ratios—click here.    

Related content: If Risk Parity is Fallible, What’s the Sharpe Option Now?