Macro Hive Conversations With Bilal Hafeez Ep. 336: David Dredge on Sharpe Ratio Fallacy, Capturing Upside and Managing Uncertainty
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Nov 28, 2025 
David Dredge, Chief Investment Officer of Convex Strategies, shares insights from over 30 years in volatility investing. He critiques traditional Sharpe-focused risk assessments, emphasizing the importance of geometric compounding and positive convexity in portfolios. Dredge discusses the perils of relying on simplistic math, advocates for active management of initial conditions, and highlights the risks of leverage in both public and private markets. He also warns about complacency in market conditions and recommends strategic positioning for better long-term outcomes.
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Sharpe Ratio Misleads On Real Wealth Growth
- Optimizing to arithmetic expected returns (the "Sharpe world") misaligns with real investor goals because it ignores path dependence and geometric compounding.
- David Dredge argues portfolios should seek positive convexity to accelerate in gains and decelerate in losses.
Risk Lives In Your Initial Conditions
- Initial conditions (your current balance sheet, leverage and portfolio state) determine your true risk exposure.
- Dredge says focus on what you control and upgrade your 'car' (balance sheet) rather than predicting exogenous events.
Leverage Creates The Real Systemic Risk
- Market fragility is endogenous: leverage and positioning (the 'dry brush') make systems vulnerable to shocks.
- Protect against spreading correlation risk rather than trying to predict triggering events.
