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OpenFactsheet

The Factsheet Tricks, 8 of 10

The perfect backtest

"What it would have earned": a simulated record chosen from many tries.

What it is

A backtest shows how a strategy would have done had it existed in the past. Try enough variations and one will look brilliant by chance. The ones that didn't work are rarely mentioned.

Why it works

  • Mathematicians have shown that impressive simulated track records are easy to produce by trying many variations, and often fail with real money.E19
  • EU guidelines limit how simulated past performance may be shown.E22
Example Growth FundFactsheet, page 1

Illustration, not a real fund

  • Our strategy would have beaten the market in every year since launch*

    “Would have” is the giveaway. Simulated records are easy to make impressive by trying many variations.E19

*Simulated past performance based on a model portfolio.

How to spot it

  • Look for "simulated", "hypothetical", "model" or "backtested" in the small print.
  • Ask which part of the record is real money and which is a simulation.

What OpenFactsheet does

Only analyzes the data you supply and can't tell real from simulated, so it asks you to check. Short or suspicious records are flagged.

Sources

  • E19 Bailey, D.H., Borwein, J.M., López de Prado, M. & Zhu, Q.J. (2014). "Pseudo-Mathematics and Financial Charlatanism." Notices of the AMS 61(5), 458–471.
  • E22 U.S. SEC (2020). Press release 2020-334, Investment Adviser Marketing Rule. U.S. SEC (2021). Investment Adviser Marketing, final rule, 86 FR 13024. ESMA (2021). Guidelines on marketing communications under the Regulation on cross-border distribution of funds, ESMA34-45-1272.

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Your money deserves more than a sales pitch. These are techniques, not accusations. We don't name or rate any fund or firm.

OpenFactsheet does not name, rate or recommend any investment or firm. The practices described are documented in research and regulation; see Sources.