ARP - Backtesting
Alternative Risk Premia strategies are usually developed using historical simulations or back-testing. This approach applies the strategy to historic data and assesses how the strategy would have performed in the past.
This memo covers:
- The challenges of overfitting vs underfitting biases in strategy development
- A framework assess back-testing results including: back-testing does not equal past performance, detecting statistical overfitting bias, assessing underlying assumptions, back-testing time series, and back-testing results vs actual performance
- Key questions for investors to ask during due diligence processes