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.This Long/ Short Equity Firm Sees A Time-Arbitrage Opportunity In This Pest Control Merger
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
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!
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