Adviser’s Hypothetical Backtested Model Deviated From Live Strategy

 

The SEC fined and censured an adviser for advertising misleading hypothetical, backtested performance and failing to retain advertisements.

The SEC charges that the firm’s marketing tear sheets used hypothetical, backtested performance strategy results that differed from the live strategy used with clients.  The backtest used different securities than the live strategy and used funds that did not correlate with securities used in the live strategy.  The firm also violated its books and records obligations by failing to retain tear sheets that included the model performance.

 

 

Don’t use hypothetical, backtested performance in marketing and advertising.  In our experience, the SEC will always find a discrepancy or challenge an underlying assumption.  And, rarely will disclosure cure the defect.  It’s also a red flag to investors that you are either hiding bad real performance or you simply don’t have a track record. 

Read SEC Order here.