Investment simulations are widely used to advance new products. While the logic for simulations is sound, the logic of the simulations themselves may be less rigorous. As the manager's goal when simulating the performance of investment products is self-serving and without peer review, the credibility of simulations can be called into question.
Fund sponsors and others who must evaluate simulated investment results should carefully question the simulation process. In particular, they should ask about the data base used, the portfolio construction technique, and the assumptions the manager made about portfolio turnover and transaction costs. The manager should be able to document construction of the simulation and defend the decisions that went into it.