Annualized Return Incorrect?

C2
1

I read a recent review on the extreme-os system which referenced the 231% annual return reported by C2. This seemed way too good to be true, so I looked up the formula for annualized return here:



http://www.investopedia.com/terms/a/annual-return.asp



After I plugged in the numbers from the system stats page ($10K starting, $242K ending and 8.5 years), I got a much more reasonable (but still very impressive) 45.5% annual return. Does C2 use a different formula to calculate the annualized return?



Thanks.



Gary

2

Hi, Gary:



I think it’s the difference between the compounded annualized return (the formula you got from Investopedia) and a straight arithmetic extrapolation.



Here’s the formula C2 is using.



1) First, based on NFA guidance, we only annualize returns in cases where there is at least 365 days of data. (In other cases, we display a straight arithmetic return.)



2) That said, since extreme-os has been tracked on C2 for ten years (wow, I’m getting old) it definitely qualifies for annualization. Here’s the formula and data we used:



(Today’s Equity - Starting Equity - Lifetime Commissions and System Subscription Costs)

/ divided by

Starting Equity



now, take that number and annualize it by multiplying by:



365 / Age of System in Days



Plug in the actual numbers and you get:



(243,013 - 10,000 - 37,209)

/ divided by

10,000



which equals: 19.5804



Now, annualize by multiplying this by



365 / 3065 (because the system age is 3065 days)



to get a final result of:



2.332



So I think the number is correct. The reason you thought differently is that you were comparing it to a compounded number.



Let me know if you have further questions.



MK

3

Hi Matthew,



I appreciate the detailed explanation, but I really think you are opening yourself up to regulatory issues (and perhaps negative user sentiment) by reporting the annual return this way. I don’t know of any fund that reports their annual returns this way. You had mentioned following NFA guidance, but a quick Google search turned up this document:



http://www.nfa.futures.org/nfa-compliance/publication-library/compliance-rule-2-29.pdf



If you look at page 12 you’ll see they specify that the annual rate of return should be calculated on a compounded basis.



I’m not trying to nit pick – I just think that C2 has built up a good reputation for providing performance statistics that can be trusted, and I feel that reporting annual return in this extrapolated manner could be considered misleading by many.



Just offering my two cents for what it is worth…



Gary

4

Hi, Gary -



I agree with your post.



I’ll change the default annualized stat to be compounded, not straight extrapolation.



Matthew