Finally someone who gets it, past performance CAN be indicative of future returns!
For starters, what else is there? More importantly, the only thing that really could be indicative of future results is the demonstration of a repeatable process – and that would be reflected in the past performance revealed by the reliable back-test of a quantitative trading strategy.
I’m referring to a recent Bloomberg article titled ‘A Manager’s Past Performance Matters More than Ever‘, allow me to present you some excerpts – but please take a read for yourself.
The author (Vasant Dhar) goes on to talk about a compelling track record (by Bernie Madoff!) and asks how we should interpret such a history.
On the Top Traders Unplugged podcast I’ve frequently heard Neils (the host) ask his guests whether they would prefer to evaluate a fund by looking at a track record, or a back test of the current strategy. It’s not surprising to me how often they decide on the back test. Despite the fact that actual performance indicates a great deal (and I’m not taking away from that), that record could have come through various strategies at different times, using different decision-making processes (or even different individuals altogether) and thus it can be hard to take that information and extrapolate it into future expectations. However, taking a back test of the current strategy and getting an idea of how the exact system which is currently running, performed over various conditions in the past, tends to provide (me at least) more confidence in what it might do in the future. There are plenty of footnotes, exceptions, qualifiers and discussion that could properly be had on the subject, but even in simplifying, I can stand behind this message and wish it were told more often.
Managers, ideas and strategies will come and go, but good process gives a numbers guy like me confidence.