How back-testing can bamboozle investors
Why back-test at all?
What can go wrong?
What’s going on?
There are several reasons for this;
1. Mean-reversion laws apply here – periods of outperformance for any fund rarely last as competitors spot an opportunity to join the party
2. Investors tend to flock to successful products and quickly make them more expensive
3. Even the cleverest strategies don’t work forever as market conditions change