Sensational SEC Finding: Backtest Gone Bad! by Jack Vogel, Ph.D., Alpha Architect

The SEC landed a $35mm fine against F-squared yesterday!

A quote from the the SEC filing:

The inaccurate compilation of historical data substantially improved the AlphaSector’s strategy’s advertised back-tested and hypothetical historical performance for the pre-October 2008 period. If an investor made a hypothetical investment of $100,000 on April 1, 2001 (assuming a reinvestment of dividends and no further contributions or withdrawals), the investment would have been worth approximately $128,000 on August 24, 2008 if invested in the S&P 500 Index. With accurately timed (but still hypothetical and back-tested) signal implementation, the same investment in F-Squared’s hypothetical ETF sector rotation strategy would have been worth $138,000. However, by implementing the hypothetical and back-tested signals one week early, F-Squared advertised the investment as worth $235,000.

So advertised backtest result grew the assets to $235k, when in reality the strategy would have only grown to $138k!

Be careful of backtests…beating the markets is nearly impossible!

http://blogs.cfainstitute.org/investor/2014/11/06/mission-impossible-beating-the-market-forever

If you liked this post, don’t forget to subscribe to Alpha Architect