Backtest Basics
A “backtest” is a model, or simulation, of how a symphony may have performed in the past based-on historical data. There are some important assumptions to understand and consider when using backtests in Composer. Below, we outline these assumptions and key differences between backtesting and live trading symphonies.
Key facts
- All backtest statistics are hypothetical and have been designed with the benefit of hindsight.
- Past performance is not a reliable indicator of future performance.
- All backtests are estimations of how the model will perform over time, in certain market environments, and are not an indicator or recommendation of any individual trading decisions either in the past or the future.
Data sources
To simulate past decisions and calculate return statistics, backtests use daily adjusted closing prices of assets making up the symphony over the backtest period. Adjusted closing prices reflect a security’s closing price adjusted for any corporate actions, such as stock splits or dividends. As such, these prices don’t represent real quotes from any point during the trading day.
When a symphony is traded live, trading decisions are made during the trading period using realtime data, which represent real quotes on the market. For this reason, as well as others below, actions chosen in a backtest and the assets selected should not be directly compared against those made by live trading symphonies.
Time of day
The symphony trading period runs from 3:50 to 4pm eastern on days the market is open. If there is significant market volatility near the end of the day–after the start of the trading period–symphony decisions made during the trading period may be different than those that would be made if using the day’s closing prices.
If volatility is high during the trading period, decisions made by different instances of the same symphony may also vary due to differences in quotes received at the precise time that each symphony is executed.
Dividend reinvestment
Backtests account for dividends and distributions.
For live trading symphonies, dividends and distributions received from symphony assets are automatically reinvested into the symphony.
Slippage and fees
Backtests account for simulated slippage and fees.
The model simulates Composer fees of $30 per month over the course of the backtest. Please note that Composer also offers an annual plan at $288 per year (a 20% discount), which is not modeled. In addition, Composer fees are charged per account and not per symphony, so if you plan on investing in more than one symphony, your actual fees will be significantly lower than simulated.
The model simulates slippage of 0.05% per transaction over the course of the backtest. When trading a symphony, actual slippage can be higher or lower than this assumption. For low-volume tickers, slippage can sometimes be higher, while high-volume tickers generally have more liquidity and won’t execute with much, if any, slippage.
The model also accounts for hypothetical regulatory fees on sales from the US Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). These are the same types of fees that are charged on sales of assets in live-trading symphonies. Composer does not benefit from these fees, and all proceeds go directly to the SEC and FINRA.
The fees applied to the backtest and in live trading are as follows:
- SEC: $5.10 per $1,000,000 of principal (sells only) - this fee is rounded up to the nearest penny on each fill or partial-fill.
- FINRA Trading Activity Fee (TAF): $.000119 per share (sells only) - this fee is rounded up to the nearest penny on each fill or partial fill and will be no greater than $5.95.
Benchmarks
Benchmarks and financial indices are shown for illustrative purposes only and are provided for the purpose of making general market data available as a point of reference only. Such benchmarks and financial indices are unmanaged, assume reinvestment of income, do not reflect the impact of any trading commissions and costs, management and incentive fees, and have limitations when used for comparison or other purposes because they, among other reasons, may have a different trading strategy, volatility, credit or other material characteristics (such as limitations on the number and types of securities or instruments). No representation is made that any benchmark or index is an appropriate measure of comparison.
Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.
The S&P 500 is not the only index used as a benchmark for measuring the performance of a portfolio. Depending upon the holdings in your portfolio, your investment objectives, and your risk tolerance, it may be more appropriate to measure performance against a different benchmark.
Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
Backtests on other trading platforms
Backtests on other platforms may make different assumptions than those used to create backtests in Composer. We encourage users to understand the full details and assumptions of backtests before making any comparisons.