An investor called us yesterday asking what it meant in some CTA materials he was reading through that the performance was proprietary. Good question.

On occasion, you’ll see performance denoted as “proprietary results.” This means that the numbers reflect the performance of money (their own or money they have an interest in) invested by a manager into their own program. Per industry regulation, a program’s track record (the results of clients on that program) must be maintained separately from the proprietary results.

But why does it matter in the end? Isn’t it technically the performance of the same strategy used to generate the overall track record? There are a few things to keep in mind:

1. Proprietary results represent the pinnacle of self-reporting bias. If a program loses money when trading in a proprietary manner, odds are you’ll never see it offered to investors.
2. Proprietary results, especially in any strategy incorporating a discretionary component into their strategy, may not reflect the true level of risk in a strategy. The fear is that a manager, when not trading with their own money, may take undue risks (or on the flip side, they may be scared with other people’s money and risk less, resulting in lower returns).
3. Proprietary results, typically speaking, don’t demonstrate a long enough track record to truly assess the risk involved in the strategies they’re meant to reflect. In this sense, those results may not be the most reliable source of data for investors (even though they are the only data available).
4. Proprietary accounts usually don’t have to pay management or incentive fees, and will normally have much lower commissions than what clients have. While many proprietary results are back-adjusted to try to reflect those fees, it’s not always consistent.
5. Proprietary results represent performance under ideal circumstances for the manager- they get to trade the strategy they created on their terms and then fashion how it’s offered to the public according to that. Their ability to replicate the performance with 10 or 20 clients staring at their account balances daily may differ. Think about it like this- proprietary results are like you saying you can hit a baseball 390 feet, and telling the story of the one time you did it in your backyard. Actual results are like being called out and having to hit a homerun in Yankee Stadium in front of a packed house.

That doesn’t mean that proprietary results are worthless. They do provide a snapshot of what a program is capable of- it just doesn’t paint the whole picture necessarily. Not all proprietary results will fall victim to each of the flaws we’ve listed. Frankly, if you’re the investor searching for the “next big thing” in the shape of an emerging CTA, proprietary results may be all you have to consider. At the end of the day, something to consider is better than nothing as you make allocation decisions, but it is important that investors understand the limitations of these results as they make their evaluations.