The Backtesting Illusion: Why Paper Returns Don't Survive Reality

This article exposes critical biases that cause backtests to systematically overestimate strategy returns—survivorship bias (excluding failed companies), look-ahead bias (using data unavailable at the time), and universe selection bias all inflate numbers. For quant traders, the implications are severe: a strategy showing 18% annualized returns often delivers only 8–10% net after realistic slippage, transaction costs, and market impact. Recognizing these pitfalls is essential because backtests reconstruct the past as viewed from the future, not the actual conditions traders face.