Hypothetical Results Disclosure

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Hypothetical performance results are any performance results derived with the benefit of hindsight. The National Futures Association (NFA) generally discourages the use of hypothetical performance results. However, the NFA also recognizes that in certain circumstances the presentation of these results may have some limited utility. Hypothetical, extracted, pro-forma, or simulated results may not be shown for any program for which the CTA has three months of actual trading results, whether for customer or proprietary accounts. In situations where a CTA elects to present hypothetical performance results for a trading program which has less than three months of actual performance the CTA must adhere to the following requirements in order to prevent the overemphasis of the hypothetical performance results:

  • The trading results must appear as the last disclosure in the document.
  • If the CTA has less than one year of experience in directing customer accounts, past performance results must be shown for any proprietary trading over the last five years or over the entire performance history if less than five years.
  • The following disclaimer must be prominently displayed. If the person for whom the hypothetical results are being shown has less than 12 months of actual results, then the disclaimer must immediately precede the hypothetical results, otherwise it may be displayed immediately following the results. If several pages of hypothetical results are shown, the disclaimer may need to be included more than once:

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.[1]

References

  1. Disclosure Document - A Guide for CTAs and CPOs. National Futures Association.