Balancing High Returns and Risk: A Sharpe Ratio Analysis of Cega’s Investment Products

Cega
Cega_fi
Published in
5 min readDec 21, 2023

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TLDR: Analyzing the Sharpe ratio of DeFi structured investing strategies shows Cega’s fixed coupon note (FCN) strategy offers exceptional risk-adjusted returns and Cega’s DCS strategy outperforms competitors.

Cega is at the forefront of DeFi innovation, consistently introducing structured investments that are not only novel to DeFi but also come with well-defined risk/reward trade-offs. Understanding these trade-offs is crucial and empowers investors to make more informed decisions about which products and strategies best suit their investment goals.

Today’s focus is on examining the Sharpe ratio, a widely used metric for comparing risk/reward ratios of financial products. Let’s dive in.

What is the Sharpe Ratio?

In the world of investments, understanding the balance between risk and return is key. This is where the Sharpe ratio comes into play. It’s a metric used to evaluate the risk-adjusted return of an investment. Simply put, it tells you how much return you are getting for each unit of risk.

The formula for the Sharpe ratio is:

In this formula:

  • R: represents the expected return of your investment.
  • r: is the return you would get from a risk-free investment, like government bonds.
  • volatility: measures the risk or variability of the investment’s returns.

So, what do the Sharpe ratio values mean?

  • A ratio above 1 is considered good because it means you’re getting more return for each unit of risk.
  • A ratio above 2 is very good, indicating strong risk-adjusted returns.
  • A ratio above 3 is excellent, showing exceptional returns in relation to the risk taken.

In essence, the higher the ratio the better, as it suggests that an investment is yielding higher returns per unit of risk. Now let’s review the analysis results below.

Fixed Coupon Notes (FCNs)

To recall, Cega’s Fixed Coupon Notes (FCNs) offer a fixed yield and provide principal protection ranging from 30% to 90% of the market movements. This structure ensures a balance between steady returns and risk mitigation.

The Sharpe ratio of Cega FCNs is compared against the market and summarized in the table below:

Table 1. Sharpe ratios and returns are summarized here. The analysis is based on data from Jan-November 2023, except the L2 vault (July-November 2023, the L2 product was launched in July).

The Sharpe ratio analysis tells us that Cega’s FCN products display significantly high performance, especially compared to competing products. Through the backtesting period, no FCN product experienced a loss (Knock-in event), which drives the strong metrics. Moreover, the high ratios can be attributed to the consistency of the yields throughout the backtesting period. Low volatility in the Cega’s high yields is one of the main reasons behind the significant ratios returned.

The robust performance of Cega’s FCNs throughout the backtesting period underscores their market competitiveness, positioning them as a strong choice for investors focused on risk-adjusted returns. Given the inherent volatility in DeFi markets, it’s important to acknowledge that these Sharpe ratios might vary significantly under different backtesting periods.

Dual Currency Strategies (DCS)

To recall, Cega’s recent launch of Dual Currency strategies (DCS) offers investors the opportunity to earn high fixed yields while minimizing potential downside. These strategies are available for various assets, including USDC, USDT, ETH, and stETH.

To understand how DCS products compare in the market, let’s look at the summarized Sharpe ratios and returns in the table below.

ETH Staking

Table 2. Loss frequency, Sharpe ratios and returns for ETH staking products, when portfolio value is expressed in USD. The analysis is based on data from Jan-November 2023.
Table 3. Loss frequency, Sharpe ratios and returns for ETH staking products, when portfolio value is expressed in ETH. The analysis is based on data from Jan-November 2023.

stETH Staking

Table 4. Loss frequency, Sharpe ratios and returns for stETH staking products, when portfolio value is expressed in USD. The analysis is based on data from Jan-November 2023.
Table 5. Loss frequency, Sharpe ratios and returns for stETH staking products, when portfolio value is expressed in USD. The analysis is based on data from Jan-November 2023.

The findings evaluated both the loss frequency and total return for these products, calculating the Sharpe ratio in both ETH/stETH and USD terms. However for products depositing USDC, we’ve focused solely on the returns and Sharpe ratios measured in USDC. Additionally, the Sharpe ratios for comparable products from other protocols are based on their publicly available total return data.

When looking at Cega’s Dual Currency Strategies (DCS) in their native currencies (ETH & stETH), they outshine competing DeFi strategies for ETH and stETH yields (see tables 2 and 4). Cega’s Sharpe ratio is positive, indicating profitable annualized returns, in contrast to competing products which show negative returns and losses. Even though the Sharpe ratio is below 1, it’s important to remember that this is measured in ETH or stETH terms. This metric doesn’t include the potential increase in ETH’s price, which is a significant part of the total return for ETH holders.

When the Sharpe ratio is calculated based on the USD value of the portfolio, which includes the increase in the value of ETH or stETH, Cega’s DCS have a Sharpe ratio near 2. The performance of the products inclusive of the increase in value continues to outperform similar DeFi strategies for ETH and stETH yield (refer to tables 3 and 5).

USDC Staking

Table 6. Loss frequency, Sharpe ratios and returns for USDC staking products, when portfolio value is expressed in USD. The analysis is based on data from Jan-November 2023.

Cega’s USDC DCS product significantly outperforms its competitors, boasting a Sharpe ratio of 8.01 compared to a competing product at 1.33. The high Sharpe ratio is characterized by the strategy’s superior yield generation, as well as its potential for benefiting investors from market gains. The unique combination of high fixed yield plus potential market gains is what gives Cega’s DCS an edge over other similar products.

Summary

The Sharpe ratio analysis of Cega’s investment products reveals two standout options for investors. The Fixed Coupon Notes (FCNs) showcase impressively high Sharpe ratios, making them an ideal option for those seeking risk-adjusted returns. On the other hand, Cega’s Dual Currency Strategies (DCS) are particularly suited for investors aiming for higher returns. This is especially true for investments in stablecoins, ETH, and stETH. The DCS stands out in the realm of option vault strategies, offering the best blend of high reward potential relative to the risk involved. You can find out more about the FCN and DCS strategies in Cega’s comprehensive documentation. Make your deposit today at app.cega.fi.

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Disclaimer

Use of Cega’s Portal and Services is subject to the Cega Terms of Service. Access and use of the Cega Portal and Services is subject to a range of risks, including financial risk including potential loss of funds. The Cega Portal and Services are not offered to persons or entities who are U.S. Persons, Restricted Persons, or Sanctioned Persons (as defined in the Cega Terms of Service). Access and use by such persons is expressly prohibited.

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Cega
Cega_fi

Cega is building the next evolution in defi derivatives with the first protocol focused purely on exotic options.