Short N Sweet is a fortnightly newsletter providing timely investment insights on current market events and trends. If you would like to join the mailing list, please reach out to your Dimensional representative.
Beware Sharpe Ratios for Private Markets
Investors often assess risk/return profiles of assets using Sharpe ratios. Some interpret the ratio, which scales an asset’s return over a risk-free rate by its standard deviation, as a measure of how much return you get per unit of risk. But this interpretation rests heavily on whether return volatility captures real-time changes in the underlying asset values.
Public markets allow assets to trade at continuously updated prices. That means changes in the assets’ fair values are instantaneously expressed through price movements. Non-traded assets, on the other hand, don’t have real-time indicators of their value. The returns are based on periodically updated net asset values (NAVs) that could be stale.
We can see this distinction in the volatility of publicly listed vs. non-listed U.S. business development companies (BDC) returns. Indices of traded BDCs are sometimes used as a public proxy for private credit as these companies primarily purchase private credit debt. Prices of listed BDCs change continuously based on the market’s views. Non-listed BDCs, on the other hand, are not exchange-traded and therefore lack a mechanism to incorporate the market’s views in real time.
The difference in volatility is not subtle. The annualised standard deviation of quarterly returns over the past five years was 13.4% for publicly traded BDCs versus just 2.7% for non-traded BDCs. And this is despite the fact that the underlying investments are often the same between the two classes of BDCs. This demonstrates the challenge in making sense out of Sharpe ratios calculated for private market strategies
Exhibit 1
Annualised Standard Deviation of Quarterly Returns
1 April 2021–31 March 2026
Past performance is not a guarantee of future results. Actual investment returns may be lower.
Glossary
Business development companies: Closed-end funds that primarily purchase private credit debt.
Net asset value: The difference between a company’s assets and its liabilities.
Private credit: Loans made to small and midsize businesses by private investment funds.
Standard deviation: A measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.
Disclosures
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.
Risks include loss of principal and fluctuating value.
Diversification neither assures a profit nor guarantees against loss in a declining market.
AUSTRALIA
This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that have been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.
NEW ZEALAND
This material is issued by DFA Australia Limited (incorporated in Australia, AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. This material does not give any recommendation or opinion to acquire any financial product or any financial advice product, and is not financial advice to you or any other person. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and for the Dimensional Wholesale Trusts the target market determination (TMD) that have been made for each financial product or financial advice product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.