Backtesting: Turning Uncertainty into Confidence

Backtesting isn’t just about numbers—it’s about providing the peace of mind that only comes from knowing your strategy has faced the markets and emerged resilient. It transforms your decisions from uncertain guesses into time-tested strategies with a track record you can trust.

Want to:

1. Validate Your Strategy? Backtesting lets you dive deep into historical data, filtering out what works from what’s doomed to fail.

2. Gauge Risk? See how a strategy survived the worst market conditions, giving you the clarity to stay the course and properly shape the return/risk discussion with clients.

3. Feel Confident? Backtesting gives you the strength to make decisions based on history, not whim.

4. Connect with Clients? Imagine being able to show not just promises but proof—backed by real data. It enhances trust, opens honest conversations, and turns speculative investment advice into fact-based confidence.

In short, backtesting isn't just a tool; it's your edge in portfolio management. It helps you validate, risk-assess, gain confidence, and communicate effectively, making it indispensable for any advisor aiming to excel in managing portfolios.

Some pitfalls of back-testing

iQUANT's Approach to Addressing Backtesting Pitfalls:

• Survivorship Bias: iQUANT has taken steps to eliminate this bias by including data on all stocks, even those that have been delisted or acquired. This ensures that the backtesting reflects a more realistic market environment, not just the performance of surviving entities.

• Data Mining: To combat data mining, iQUANT encourages a disciplined approach to data analysis. They suggest keeping the process simple, with fewer parameters, and testing models across different markets and time periods to ensure the strategy's validity isn't just a product of cherry-picked data.

• Limited Historical Data: While recognizing the limitation of historical data not perfectly predicting the future, iQUANT uses extensive historical datasets, some going back to 1974, to provide a broad perspective on how strategies might perform over time. This extensive data usage helps in understanding long-term trends and risks.

• Look-Ahead Bias: iQUANT addresses this by using point-in-time data, ensuring that the information used in backtesting was genuinely available at the time the decision would have been made, thus avoiding the use of future knowledge in past decisions.

• Transparency: iQUANT's backtesting process is designed with transparency in mind, detailing how data is sourced, adjusted, and analyzed. This transparency helps in understanding the methodology behind the results, fostering trust in the backtesting process.

• Real-World Application: iQUANT's backtesting isn't just about historical performance but also about preparing strategies for real-world application. They stress the importance of considering transaction costs, market liquidity, and other practical aspects that might affect strategy performance outside of backtested results.

Imagine the relief of letting go of day-to-day market noise. A backtested model might not win every day or even every year, but it gives you the confidence that over time, it’s built to outshine the benchmarks.