Evaluating Structured Strategy Backtests: Peer Benchmarks, Regime Timing, and Live Performance

TL;DR

This paper assesses how well structured strategy backtests predict live performance, revealing that pro-forma results often do not translate well into actual trading outcomes, especially after extreme market conditions.

Contribution

It provides empirical evidence that marketed backtests mainly reflect pre-launch market regimes rather than strategy skill, emphasizing the importance of peer benchmarks.

Findings

Pro-forma performance weakens significantly in live trading.

Backtests mainly reflect pre-launch factor regimes, not strategy skill.

Strategies launched after strong factor conditions perform worse subsequently.

Abstract

Institutional allocators often evaluate structured strategies on the basis of marketed backtests -- hypothetical track records constructed by applying a strategy's rules to historical data prior to any live trading, also referred to as pro-forma performance. It is unclear how much of that signal survives once the strategy is actually traded. Using 1,726 commercially distributed structured strategies from ten global institutions, this paper shows that raw pro-forma performance has only limited portability into the live period and weakens sharply once live outcomes are measured relative to peer and external benchmarks. The evidence indicates that marketed backtests predominantly reflect the common factor regime present before launch rather than strategy-specific skill. Strategies launched after unusually strong bucket-factor conditions experience materially worse subsequent deterioration. For allocators, the implication is practical: backtests should be judged relative to appropriate peer benchmarks, and the discount applied to them should increase when launch occurs after an extreme factor run.