Risk
Skewness
Whether a return distribution leans towards large gains or large losses.
How it works
Positive skew means many small losses and occasional very large gains — the shape of venture investing. Negative skew means many small gains and occasional catastrophic losses.
Negative skew is dangerous because it looks excellent right up until it does not. Strategies that sell insurance of any kind — writing options, credit strategies, carry trades — have this shape by construction.
Where it misleads people
A steady, low-volatility track record can be a negatively skewed strategy that has not yet met its bad event. Judging such a strategy by its Sharpe ratio flatters it enormously.
Related terms
- Fat tailsThe tendency of extreme market moves to happen far more often than standard statistics predict.
- KurtosisHow much of a distribution sits in its extreme tails rather than near the middle.
- Sharpe ratioReturn above the risk-free rate, divided by volatility — how much return each unit of risk bought.
- Downside deviationVolatility calculated using only the returns below a threshold, ignoring upside moves.
Mentioned in
More in Risk
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.