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The historical tests that don’t predict the future for smart beta strategies

A research paper from Vanguard released last week flagged issues about the limitations of back-testing to predict the future

Marketing materials of many smart beta providers claim their strategies have been back-tested against economic conditions to ensure they perform in line with the stated objectives.

In effect, the provider will use computing power to see how its strategy would have fared if it had been operating years, perhaps even decades ago, to reassure investors that the strategy is robust.

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