Author: @RyskyGeronimo
Compiled by: Ashley
Editor's Note: This article introduces the Hyperliquid HLP vault, which shows its low volatility, high Sharpe ratio, and negative correlation with BTC, and that a combination strategy can significantly improve returns. As HLP's TVL grows, its volatility converges and Sharpe ratio improves, potentially becoming a quality use case for HyperEVM.
The following is the original content (edited for readability):
I am pleased to share an analysis of the risk and return of the Hyperliquid HLP vault.
Conclusions:
Cumulative return: 143% (HLP) vs 264% (BTC)
Annual volatility: 17.89% (HLP) vs 45.67% (BTC)
Sharpe ratio: 2.89 (HLP) vs 1.80 (BTC)
Maximum drawdown: -6.6% (HLP) vs -23% (BTC)
Leverage amplifies both gains and losses. Due to HLP's lower volatility, it can withstand higher leverage (2.5x) before reaching the same risk level as BTC. By adjusting HLP's risk to match BTC's volatility, the overall return is significantly improved.
HLP has a -9.6% negative correlation with BTC. In other words, when BTC (and the crypto market as a whole) declines, HLP often exhibits an opposite trend. This negative correlation creates opportunities to enhance returns.
An 80% HLP + 20% BTC portfolio would increase the cumulative return to 175%, while reducing volatility to 16% and achieving a Sharpe ratio of 3.6. If this portfolio is leveraged to match BTC's volatility, the cumulative return could exceed 1000%.
HLP's early volatility was higher, but as its TVL has grown (currently over $500 million), its volatility has continued to converge.
The data from the past 52 weeks shows that while HLP's full-cycle compound annual growth rate (CAGR) is 42%, its CAGR for the last 12 months has dropped to 22%. Correspondingly, its annualized volatility has also decreased to 4.5%, driving its Sharpe ratio to jump to 5.2!
The Hyperliquid team had anticipated this: "More market makers joining will have a positive impact on HLP. As HLP no longer needs to bear all the risk, the strategy's Sharpe ratio will further improve."
Through a cycle of double-digit returns and low volatility, HLP may become an interesting use case on HyperEVM.
As the vault's capital base expands, we can expect growth rates to slow. Due to the increase in scale, monthly returns have become more stable. The recent average monthly return of around 1.75% is still attractive, especially compared to the volatility of the token.
Note that since the vault's lifetime data is provided in 4-day intervals rather than daily, the data needs to be resampled to weekly intervals, which will almost certainly introduce some tracking error.
Since mid-2023, the HLP vault has made significant progress, evolving from a niche market-making vault to a strategy with over $500 million in TVL.
Looking ahead, further transparency - particularly in daily return data - will help users track HLP's performance more accurately. HLP is a typical example of how decentralized market making can achieve stable risk-adjusted returns and provide a differentiated source of on-chain returns.
