Incentive Structure - Discussion

In the Ranking section we described our scoring system which bins traders into brackets according to their average returns, then sorts them within brackets according to their Sharpe ratios.

The Gothic Hedge Society prefers this structure because it’s consistent with our values of rewarding intelligent risk-taking, but it also comes with several other desirable qualities:

1. It makes the Competition interesting to watch

You can’t win cash prizes unless you’re in the top half of the top bracket – which you can only accomplish if you post a big return. BUT, within that bracket you’re placed towards the bottom if you have a high volatility, meaning that you won’t win any real money.

This is the reason why we chose nn = 10 for the bracket sizes – that’s 2x the number of paid cash slots available.

Those traders who are not in the top bracket are incentivized to get there by making more money.

Those who are in the top bracket are incentivized to watch their volatility so that they can stay there, or increase their rank. But… decreasing volatility means that those top traders will probably have to sacrifice in terms of returns… which risks them being bumped into a lower bracket!

2. It keeps traders engaged throughout the entire event

If you’re in a lower bracket and don’t have much hope of reaching a top slot before the Competition ends, you are still interested in trading because you want to reach the top of your bracket – and maybe reach the next one up. It gives everyone a shot at winning some bragging rights (“I was #3 in my bracket”) and telling a good story to potential interviewers about how you handled a rough situation and improved it as much as possible.

3. It prevents ‘Sharpe Ratio Hacking’

Last year the competition was scored using Sharpe ratio alone, but two very disciplined traders – Hoppity and Bubbles – dominated the competition by running a strategy that earned a tiny return with a volatility that was even smaller, resulting in massive Sharpe ratios. The Gothic Hedge Society found this behavior to be:

  • innovative
  • fair & valid
  • extremely annoying :)

We salute Hoppity and Bubbles – who are great people – for their success but we want to be sure that others don’t follow suit because at the end of the day this competition is about making money.