What Is Skewness?
Skewness measures how asymmetric a return distribution is. Positive skewness means the distribution has a long right tail (occasional large gains, frequent small losses). Negative skewness means a long left tail (occasional large losses, frequent small gains).
Most trading strategies have inherent skewness. Trend-following typically shows positive skewness (rare big wins, many small losses). Mean-reversion and option-selling strategies typically show negative skewness (many small wins, occasional large losses). The skewness shape is more informative than average return alone.
Negative skewness in a strategy is a warning sign: most months look great until the bad month, which can wipe out years of gains. Many famous blow-ups (LTCM 1998, hedge funds in 2008, several volatility funds) had negatively-skewed return profiles that looked smooth in backtest but catastrophic in reality.
Related terms
- Volatility — A statistical measure of how much an asset's price varies over a period.
- Sharpe Ratio — Risk-adjusted return — the excess return per unit of volatility.
- Sortino Ratio — Like Sharpe, but only penalizes downside volatility — better for asymmetric strategies.
- Maximum Drawdown — The largest peak-to-trough decline in account value or strategy returns.