How the Sharpe Ratio Died, and Came Back to Life

33 Pages Posted: 3 May 2018 Last revised: 29 May 2018

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; Abu Dhabi Investment Authority; True Positive Technologies

Date Written: May 3, 2018


Selection bias under multiple backtesting makes it impossible to assess the probability that a strategy is false (Bailey et al. [2014]). This has two implications:

1) “Most claimed research findings in empirical Finance are likely false” (Harvey et al. [2016]) 2) Most quantitative firms invest in false positives

Selection bias explains the high rate of failure among quantitative hedge funds: They do not have the technology to distinguish between a true strategy and a false strategy.

The goal of this presentation is to introduce such technology, so that academic journals, regulators and investors may discard false strategies with confidence.

The full paper can be found at

Keywords: Backtest overfitting, selection bias, multiple testing, quantitative investments, machine learning, financial fraud

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

López de Prado, Marcos and López de Prado, Marcos, How the Sharpe Ratio Died, and Came Back to Life (May 3, 2018). Available at SSRN: or

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States


Abu Dhabi Investment Authority ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates


True Positive Technologies ( email )

United States


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