How to Measure True Performance in Alternative Investing

Understand Sharpe Ratios, Ex Ante metrics, and how Splint Invest helps you build smarter portfolios.

Why Understanding Risk-Adjusted Returns Matters

Most investors are familiar with returns, the headline numbers that tell you how much your money has grown. But sophisticated investors know that how you achieve those returns is just as important as the returns themselves. That’s where risk and risk-adjusted metrics like the Sharpe ratio come into play.

If you’re investing in contemporary art, Swiss watches, or classic cars, you’ve likely noticed that these assets behave differently from stocks and bonds. So how do you compare them? And what do all those numbers, volatility, Sharpe ratio, ex ante, ex post, mean for your portfolio? Let’s break it down.

The Basics: Return, Risk, and the Sharpe Ratio

• Return: The percentage gain (or loss) on your investment over a period
• Risk (Volatility): How much your investment’s value fluctuates. High volatility means bigger ups and downs.
• Sharpe Ratio: Measures how much return you get for each unit of risk you take.

Why Does This Matter?

A higher Sharpe ratio means you’re getting more reward for the risk you’re taking. But with alternatives, a “lower” ratio can still be efficient if the asset offers stability, diversification, or cultural value. Even more important than that, what exactly is a “higher” and “lower” Sharpe Ratio?

What the CFA Institute Says About the Sharpe Ratio

• Comparative usage: The Sharpe ratio is most meaningful when used to compare investments that are similar in risk profile.
• Consistency and Context: A consistently high Sharpe ratio over long periods or across different market conditions is more meaningful than a single high snapshot.

There’s no universal academic cutoff for what counts as a “good” or “excellent” Sharpe Ratio—but common thresholds often include those found in traditional portfolios aiming for ratios above 1, with many ETFs delivering around 0.5–0.75 in volatile markets.Real-World Comparison: Stocks vs. Alternative Assets

Most traditional ETF portfolios aim for a “good” Sharpe ratio. But in volatile markets, it’s common to see:

• Broad index ETFs: Sharpe around 0.5 - 0.75.
• Alternative assets: a Sharpe between 0.6 - 1.1 is generally considered good, especially when viewed in the context of overall portfolio diversification.

Why? Because alternatives can smooth out portfolio swings and reduce overall risk, even if their standalone Sharpe ratio isn’t sky-high.

Key Takeaways

• Traditional portfolios often target a Sharpe ratio above 1, but in practice, ratios between 0.5 and 0.75 are common, especially in volatile markets.
• Consider assets in the context of the overall portfolio. Alternative assets like art, whisky, and collectibles can be efficient even with Sharpe ratios in the 0.6–1.1 range because they may improve diversification or risk-adjusted returns.

Ex Ante vs. Ex Post: Looking Forward and Backward

• Ex Ante: These are forecast or expectations, what you think will happen based on data or models.
• Ex Post: These are actual results, what really happened.

What Do We Do at Splint Invest?

At Splint Invest, we know that valuing illiquid assets—like art, collectibles, or rare watches—requires a careful and transparent approach. Here’s how we keep our risk and return estimates realistic and protective for our investors:

• Direct Asset Analysis: When possible, we analyze the asset’s own historical data to estimate expected return and standard deviation, providing the most relevant risk/return profile.
• Best Comparable When Data is Limited: If fewer than 30 data points are available, we use the best comparable—such as the Artprice index or similar artists with strong transaction records—to inform our estimates.
• Conservative Adjustments: To add extra protection, we may use only 50% to 90% of historical returns and multiply the standard deviation by 1.5 or 2.0, accounting for uncertainties of illiquid markets.
• Focus on Ex-Ante Sharpe Ratio: Our process is designed to produce a forward-looking (ex-ante) Sharpe Ratio, based on expected, not just historical, returns and risks—crucial because past performance may not repeat itself, especially in data-scarce or changing markets.
• Clear Communication: We use charts and bullet points to make these metrics easy to understand, so you always know how we assess risk and return in your portfolio.

Other Important Metrics to Consider

• Correlation: Measures how an asset’s returns move in relation to others.
• Sortino Ratio: Focuses on downside risk (more investor-friendly than Sharpe).
• Treynor Ratio: Measures return relative to market risk (beta).
• Drawdown Risk: Tracks the worst-case scenario in a market drop.
• Value at Risk (VaR): Estimates the potential maximum loss in a given period.

Final Thoughts: Smarter Investing Starts With Better Questions

For modern investors, especially in Europe, understanding these metrics isn’t about spreadsheets—it’s about building resilient, meaningful portfolios.

Don’t chase the highest Sharpe ratio.

Look for how each asset complements your overall strategy.

Use Ex Ante analysis to set expectations, and Ex Post results to refine your strategy.

Sometimes, a “low” Sharpe ratio asset could be exactly what your portfolio needs for stability and diversification!