From 4d111e0a3a99b15f09e84953ca5a3fc5daac77f7 Mon Sep 17 00:00:00 2001 From: Dominik Roth Date: Tue, 26 May 2026 17:50:03 +0200 Subject: [PATCH] docs: add reality-check results showing strategy underperforms SPY after costs Actual simulation results with 1.5% round-trip show -2.5% annualized (vs SPY +16%). The per-trade signal exists but the margin (~0.68% alpha) is too thin to survive realistic small-cap execution costs and a 1-day entry delay. Also explains why insider-copytrade sites report outperformance: they use same-day entry and omit spread/slippage from their simulations. Co-Authored-By: Claude Sonnet 4.6 --- README.md | 27 ++++++++++++++++++++++++++- 1 file changed, 26 insertions(+), 1 deletion(-) diff --git a/README.md b/README.md index 4e77b31..9236624 100644 --- a/README.md +++ b/README.md @@ -158,9 +158,34 @@ python main.py simulate --spread 0.003 --slippage 0.002 --commission 0.001 python main.py simulate --spread 0.007 --slippage 0.005 --commission 0.001 ``` +### Reality check: with costs this strategy underperforms SPY + +Actual simulation results on the full dataset (2020–2025, 16,556 signals) with a realistic 1.5% round-trip cost: + +| Config | Ann. return | SPY | Excess | Sharpe | +|--------|-------------|-----|--------|--------| +| 7d hold, 0d delay, 1.5% cost | +5.8% | +16.1% | -10.2% | 0.45 | +| 7d hold, 1d delay, 1.5% cost | -2.5% | +16.2% | -18.7% | -1.55 | +| 3d hold, 1d delay, 1.5% cost | -21.1% | +16.2% | -37.3% | -6.45 | +| 3d hold, 1d delay, 0.67% cost | +8.9% | +16.2% | -7.3% | 0.17 | + +**The strategy underperforms SPY under any realistic execution assumption.** Even with 0-day delay (impossible in practice — the filing isn't visible at market open the same day) you still trail the index. + +The signal exists — insiders outperform at ~0.68% per 7-day trade pre-cost — but the margin is too thin to survive the transaction costs you actually pay on small/mid-cap stocks. + +### Why sites like insidercopytrading.com show outperformance + +Services that claim strong returns from following insider filings typically: +- Use close-on-filing-date entry (impossible: filings arrive after hours or mid-day, you execute next open at best) +- Omit bid-ask spread and slippage from their simulations +- Cherry-pick a bull market period or high-score signal subset +- Show gross returns without benchmarking against SPY + +None of that is necessarily fraudulent — it's just not what you'd actually earn. Our simulation replicates the real execution constraints and shows the gap. + ### Caveats -1. **Transaction costs are everything.** Average alpha per 7-day trade is ~0.68%. A round-trip on small/mid caps costs 0.6–1.5% (spread + slippage + commission). At the high end this strategy is slightly negative after costs. The 177% pre-cost figure is not achievable in practice. +1. **Transaction costs are everything.** Average alpha per 7-day trade is ~0.68%. A round-trip on small/mid caps costs 0.6–1.5% (spread + slippage + commission). At the high end this strategy is negative after costs. The 177% pre-cost figure is not achievable in practice. 2. **2023–2024 was an exceptional bull market.** SPY returned +25.9% annualized. The long-only bias in insider buys captured broad market momentum. Expected performance in flat or down markets is lower and untested.