Constructing pre-listing paths for new fund sleeves

Too little live history

Newly listed funds and exchange-traded products often leave too little history for testing. A weeks-to-months study that needs only percentage changes can rebuild earlier prices from a closely tracking index when tracking error is small.

An index-proxy is a longer-lived benchmark or highly correlated vehicle used in place of a short-history fund so an intermediate-horizon sleeve can be studied in a broader market path.

Building the synthetic price path

When the product tracks its intended index with correlation near 1.0, each synthetic price is the prior price times one plus intended beta times the index's one-day return. Inverse products use a negative beta.

A synthetic price path is that constructed daily series. It applies a stated or measured beta, and often a slippage term, to a proxy's returns so a new vehicle can be examined over a longer window.

Beta, drag, and the slippage adjustment

Average drag versus the index can run to one or more percentage points per year. Expenses, trading costs, leverage costs, and dividend treatment are bundled as slippage. Leaving that drag out of the reconstruction can overstate a later system test.

A slippage adjustment is a daily additive term that absorbs average under- or outperformance versus the proxy from those same sources, plus tracking error.

Linear-regression is a least-squares fit of the listed product's daily percentage changes on the proxy's daily percentage changes. The slope is measured beta. The intercept is average daily slippage.

One 1.5-beta fund showed a daily intercept of -0.0021 percent, or -0.53 percent over 252 sessions, as an average rather than a daily constant.

When a surrogate fund stands in

If the target has no declared index, a longer-lived highly correlated surrogate can serve as the proxy. A surrogate fund is a different but highly correlated vehicle, often an older open-end fund used for a newer exchange-traded product.

Correlation above 0.9 is preferred. Correlation above 0.8 is treated as a floor.

A 2x health-care listing

For a 2x health-care product listed on 2/2/2007, a same-benchmark unleveraged index series produced beta 1.96 and yearly slippage of +1.7 percent. A health-care mutual fund that began on 9/1/1988 produced beta 2.03 and yearly slippage of -1.15 percent.

A fully corrected synthetic path tracked the live 2x series more closely than a naive 2x scale of the same index.

One procedure on the joined series

After listing, the path is continued by compounding the product's own successive daily price ratios, with distributions and splits treated consistently.

Walk-forward-analysis is a single continuous test of entry, exit, and abstention rules across that stitched series. It uses reconstructed returns before listing and the product's own daily changes after listing, so a weeks-to-months procedure can be walked across one continuous series.