you can get very high stats (good shapre , low draw-downs, lots of of winning months) just by going 'long' short-duration bonds and or selling far out of money index options. The problem is you may not make much money. You can sell a S&P 500 1000 put but you'll only make $500 over 6-12 months with $100k at risk. However, this is path dependent, meaning that large losses may be sustained on paper until the storm subsides. Even long 3-month t bills gives an infinitely high sharpe but the returns are crap
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I don't think you really understand the Sharpe Ratio -
Sharpe = E[Return - Financing] / StDev[Return - Financing]
Going long 3 month T-bills does not give an infinitely high Sharpe Ratio (if it did, everyone who could would lever it up and do it in large size).
As an experiment, I simulated holding a long position in the nearest to expire Eurodollar futures contract (which give a return similar to the 3 month T-bill return) and rolling every 3 months, which gives a Sharpe of 0.92, an annualized return of 0.65% and annualized standard deviation of 0.7%.
Similarly, a long position in nearest-month two year treasury futures contracts gives a Sharpe of 0.94 with 1.59% annual return and 1.67% volatility.
These are attractive Sharpes (better than equities!) but they are certainly not infinite, and to juice up the returns to anything approaching an equity investment you need to be looking at 5-10x leverage.
Your point about selling puts, with skewness/kurtosis risk which is not priced by Sharpe, is a fair one, and probably the most common method of gaming returns, but it is a side-issue.
> Even long 3-month t bills gives an infinitely high sharpe but the returns are crap
If your investment has a high Sharpe ratio (especially in respect to other investments), by definition you have the highest returns at the lowest risk (variance) possible, so you can't have a "infinitely high" Sharpe ratio with "crap" returns.
Investments with low returns and low risks are penalized by Sharpe just as much as investments with high returns and high risks for the same reason: the expected value is simply less in both cases than for the ones with highest returns at lowest risk.
If you're a hedge/venture fund you will want to optimize for a high Sharpe portfolio eventually, you simply can't survive if you keep losing money for investors in the long run (low expected value).
Selling out of the money puts will almost never generate a downdown. Hence an infinite sharpe because the denominator is zero. Technically you are still beating the risk-free rate but there is a lot of downside risk not accounted for in the shapre ratio. Often a huge amount of leverage is applied to boost returns.
except for the occasional once-in-a-decade event that would bankrupt you. On the time scale where selling out-of-money puts makes sense, the market is efficient and there is no free lunch.
spending a decade high rolling at yacht week is totally worth it though. don't pretend like unsustainable luxury is a bad thing, much better than just dreaming about it
also, you can mitigate black swan events by not being too leveraged up, and going further out on expirations. and finally, just keep rolling.
No, you can't mitigate black swans that way. To get any return on selling out of the money put options (with even the remote semblance of sustainability) you have to have a crazy 100x or 1000x leverage.
And you can't just going further out on expirations without posting proper margins. That is, you can, but not legally.