On the backtest and the prospectus.
A trader asks counsel whether his strategy can be marketed to investors. The counsel asks, instead, whether what he knows can be taught.
TRADER"The backtest shows a Sharpe of 2.1 over twelve years. May I put it in the deck?"/q:1
COUNSEL"Did the strategy trade those twelve years, or did the code trade them?"/q:2
TRADER"The code."
COUNSEL"Then under Rule 206(4)-1, the deck must say so. Hypothetical performance is not prohibited. Pretending it is actual is."/q:3
⁂
TRADER"In the Meno, Socrates asks whether virtue can be taught. He concludes one cannot teach what one cannot define. May I teach what I have only backtested?"/q:4
COUNSEL"You remember the dialogue. At 80d the slave boy is led to a theorem he has never seen. Socrates calls it recollection. The SEC calls it cherry-picking. The difference is whether the boy could have failed."/q:5
TRADER"My code could have failed."
COUNSEL"On paper. Not in the market. The market charges a fee for failure that paper does not collect."/q:6
⁂
TRADER"So what may I show?"
COUNSEL"Your three years of live trading, net of fees, with the drawdowns intact and the size as it was — not as you wish it had been. Then, separately, your backtest, marked as such, with the assumptions disclosed."/q:7
TRADER"The backtest is the better number."
COUNSEL"It is. It is also the one no one funded. Allocators know the difference. The ones who do not are the ones who will sue you when the live number does not match."/q:8
⁂
TRADER"And the 3(c)(1) versus the 3(c)(7)? Which exemption do I want?"
COUNSEL"Whichever lets you take the investors you actually have. Do not pick the structure first. Pick the LPs first; the structure is what the LPs make legal."/q:9
TRADER"That is backwards from how every fund admin describes it."
COUNSEL"Fund admins sell structures. You are buying investors. The two are not the same trade."/q:10
⁂
TRADER"If I can teach this — write it down, give it to a successor — does that change the offering?"
COUNSEL"It changes the diligence the LP will do. A strategy you can teach is a strategy that survives you. That is the only kind worth a ten-year fund."/q:11
⁂
Coda. The deck was rewritten with the live track in the front and the backtest in an appendix. The first LP committed at a third of what the trader had hoped for. The second, six weeks later, at twice that. The strategy continues to be teachable, which is to say: it has not yet stopped working.
— D. A., this 21st of June, MMXXVI.