"Our portfolio returned +30% per year over the last 5 years."

Apparently impressive statement. In practice, almost useless. Without five more data points, it's impossible to know if this is (a) genuinely good management, (b) luck, (c) statistical illusion, or (d) pure overfitting. This post shows the numbers that matter and — perhaps more importantly — what you should ask before believing any of them.

The numbers that matter

CAGR — Compound Annual Growth Rate

The compound annual growth rate. It's the return equivalent per year that, compounded, takes you from initial to final value. Unlike the arithmetic average of annual returns — which overestimates when there's volatility — CAGR is what you actually get.

Caution 1: CAGR critically depends on the start and end points. If you begin the backtest in February/2009 (crash bottom) and end in January/2021 (pre-high-Selic peak), the CAGR of any stock portfolio will look magical. Always ask: what's the full period? Does it include at least one bear cycle?

Caution 2: CAGR alone says nothing about risk. A portfolio with +20% CAGR and -70% maximum drawdown is very different from one with +14% CAGR and -25% maximum drawdown — the second is objectively better for someone who needs the money within a certain timeframe.

Sharpe ratio

Excess return over the risk-free rate, divided by volatility. In Brazil, risk-free rate = CDI. (CAGR − CDI) / annualized volatility.

Sharpe above 1.0 is rare and very good. Above 1.5 suggests something between "exceptional strategy" and "backtest with bias." IBOV historically runs Sharpe between 0.3 and 0.6 — so anything well above 1.0 over a long window deserves technical skepticism before admiration.

VORTEX QSP delivers Sharpe of 0.96 in 7.3 years walk-forward. Significantly above IBOV (~0.53), but within plausible range for multifactorial strategy — it's not the type of number that screams "overfitting."

Sortino ratio

Variant of Sharpe that penalizes only downside volatility (downside deviation), not upside. Makes more economic sense — investors don't complain about positive volatility. Sortino above Sharpe is typical of favorable asymmetric strategies.

Max drawdown

The largest peak-to-trough decline in the equity curve during the entire period. It's the number that hurts you most emotionally when it happens. Strategies with smaller drawdowns have much higher adherence rates — because the investor doesn't give up mid-way.

VORTEX QSP had Max DD of -33.2% in 2020-2022 (pandemic + interest rate shock). IBOV had -46.8% in the same period. 14 percentage points less is the difference between "a portfolio that hurts but you can handle" and "a portfolio you liquidate at the bottom."

Information ratio

Alpha over the benchmark, divided by tracking error. Measures consistency of outperformance. IR > 0.5 is already considered excellent in equity quant; > 1.0 is extremely rare.

Beat rate

Percentage of windows (years, months) in which the strategy beat the benchmark. VORTEX QSP beats IBOV in 6 of 8 years — beat rate of 75%. Beat rates of 100% should raise suspicion; the market has enough noise that nobody wins all the time.

The three questions that separate honesty from fiction

1. What's the universe?

A strategy "that returned 25% per year buying Brazilian small caps" is radically different from one that returned the same buying IBOV blue chips. Small caps have more alpha potential but also less liquidity, more slippage, and the backtest may be exaggerated because bankrupt stocks were retroactively removed from the universe.

VORTEX QSP uses IBrX-100 universe with minimum liquidity. It's a conservative universe — alpha may be lower than in small caps, but it's replicable in real life without significant market impact.

2. What's the period?

Period too short (3-5 years) doesn't cover different regimes. Period too long (10+) risks looking backward. Empirical sweet spot: 7-10 years covering at least one bull and one bear. VORTEX QSP covers 7.3 years including pandemic, interest rate shock, two governments.

3. What's the exit rule?

Every strategy makes mistakes. The question is: when a sequence of errors arrives, what happens? Strategies with disciplined rebalance logic (monthly, fixed rules) tend to perform as the backtest suggests. Strategies that depend on "manager feel" for entries and exits rarely perform what they claim.

Warning signs

Be especially careful with:

How VORTEX QSP presents itself

The Performance page publishes all numbers — CAGR, Sharpe, Sortino, Max DD, beat rate, information ratio — with full month-by-month breakdown, no filters. Good months and bad months appear the same way. Including the two years VORTEX QSP lost to IBOV.

Walk-forward without look-ahead is described in detail in the post Walk-forward backtest: how not to fool yourself.

To close

Historical performance does not guarantee future performance. This disclaimer is true but insufficient. The more important question is not whether the past repeats — it's whether the method is replicable, auditable, and disciplined. Rigorous backtests (walk-forward, frozen parameters, realistic costs) are a necessary condition. They don't provide guarantees, but they separate serious conversation from marketing.

Everything VORTEX QSP publishes has met these criteria. It doesn't mean it will work in the next cycle. It means if it doesn't work, it will be because the market changed structurally — not because the backtest was an illusion.