Capital Efficiency Matters If you care about long-term CAGR, you actually want volatility. Volatility means your money is working harder per unit of funding. I asked grok to compare simulated returns on two hypothetical investment strategies: 1) Sharpe Ratio = 1, volatility = 20% 2) Sharpe Ratio = 2.5, volatility = 5% Everyone thinks strategy 2 is better, and its certainly easier to hold and harder to build. But after 10 years you are between 80-90% likely to have made more money with strategy 1 than with strategy 2, depending on how correlated they are. (The more correlated their returns streams between 1 and 2, the lower the volatility of the diff, and therefore more likely you are to do better with 1) The challenge, of course, is risk managing the left tail, which is considerably easier to do with strategy (2). And TOO much volatility nearly guarantees permanent capital destruction, so you need a judicious approach. Too much leverage is a really terrible idea. Still, the point stands - for many investors it makes sense to make your money work harder by being willing to warehouse the fluctuations arising from a judicious application of dynamic leverage. This is one obvious path to better CAGR... *if* you can withstand the noise. Some nice charts from grok.

Sep 6, 2026 · 11:03 AM UTC

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some more discussion on this here:
Replying to @CMcgarraugh
I like this post and mostly agree. I have noticed, though, that 2.5 Sharpe strategies use more leverage because they hedge out more uncompensated bets, and the increased leverage makes it harder to manage tail risks. Has your research found otherwise?
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Replying to @CMcgarraugh
Charlie, are you advising any other CTA style ETFs?
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Not yet, but soon. I think Altis has something useful to offer to the marketplace, and we want to have the opportunity to play a supporting role in our clients' future successes. The inbound inquiry we have received over the last week has been very encouraging.
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Replying to @CMcgarraugh
If you’re saying 20% expected returns are better than 12.5% I’d have to agree with you 😜
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Haha yes I am saying that - glad that's not controversial. But I am ALSO saying that the power of that higher expected return, over time, even with the much higher dispersion of outcomes AND even with the volatility drag, means you are very likley to be better off in the low sharpe strategy because its working your capital so much harder. Remember: Expected Geometric Return = Expected Arithmetic Return - (volatility^2)/2 So with a Sharpe of 1.0 and vol of 20%, over the long run you can expect: G = 20% - (0.2^2 / 2) = 18% CAGR Strategy 2 has G = 12.5% = (0.05^2 / 2) = 12.25% CAGR. Point being volatility can be a feature not a bug, even with the well-known cost of volatility drag accounted for. Put different: I think Sharpe is overrated in the industry, and capital efficiency is underrated... especially if you have a long horizon.
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Replying to @CMcgarraugh
If both options are available, and 20% volatility is acceptable, then just leverage Strategy 2 four times and invest in that. Far better outcome.
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Sure, if you can lever it for free. But if the cost of levering it up is, say 7% per year, then maybe not. Also, I've noticed that there aren't that many reliable, leverage-able, liquid, 2.5 sharpe assets out there on offer! Typically to have a return stream like that, it will already be either a) built out of highly levered positions that are selling un-observable tail risk or b) higher frequency and not scalable/not accessible. And that's ok, because you can do well over time with capital-efficient product focused on CAGR.
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Replying to @CMcgarraugh
Nice. A Q: do you think that to grasp the real difference between leverage levels a direct leveraging of the NaV and checking its statistics are good enough, or is it necessary to redo the whole backtest with higher level of -say- margin to equity for derivative portfolios ?
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I think it may be better to look at margin-to-equity levels and use derivatives. If you just use a NAV returns multiplier and a static funding cost assumption, you aren't going to capture the moves in funding costs that really happened historically in your backtest. Also, importantly, the implicit leverage embedded in futures leverage is generally cheaper than physical securities leverage from your broker, since they are charging a spread on their securities lending, whereas futures leverage is priced by the market on a 2-way basis through the clearing house. In the end I think its prob worth paying up for a futures advisor to do this on your behalf, but of course i would say that since I own and operate a Commodity Trading Advisor business. And everyone's tax situation is different, so that has to be evaluated case-by-case with your tax advisor.
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Replying to @CMcgarraugh
This is consistent with my experience.
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Replying to @CMcgarraugh
will be following closely… love some uncorellated vol
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Replying to @CMcgarraugh
I feel like this is missing what makes #2 a better strategy which is it is far more scalable. You can lever higher sharpe at that better risk adjusted level (biz model of pods). #1 you’re just hoping you don’t have an outlier drawdown but do have an outlier increase.
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Replying to @CMcgarraugh
The best of both worlds is very high individual asset vol that cancels out at portfolio level through low correlation. This is why you should never judge an asset in isolation. Even a 0.2 Sharpe asset can be highly accretive at portfolio level if it is uncorrelated.
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Replying to @CMcgarraugh
Volatility isn't inherently bad. Uncompensated volatility is.
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Replying to @CMcgarraugh
I always thought of volatility as not just the risk of loss, but also the capacity for gains. You could technically have a high volatility, but it’s all upside deviation…
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Replying to @CMcgarraugh
Many investors are just doing that, picking stocks - lottery tickets type of strategy. And for small amounts of money is ok. But for managing entire wealth, strategy no 1 increases the probability of ending with lower money that you started. The median return is misleading
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Replying to @CMcgarraugh
Can you make a ucits for us to enjoy?
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Replying to @CMcgarraugh
Agreed
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Replying to @CMcgarraugh
Ah, ecco...
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Replying to @CMcgarraugh
"simulated returns on two hypothetical investment strategies" = I made this up to fit my thesis.
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