For every strategy participating in C2Star, we monitor the amount of time it is in a fully-certified state. So, for example, imagine that you start your strategy on day 1. You perform well. Starting on day 61, we can begin to ask: “Did the strategy beat the SP500 for the preceding 60 days?”
For as long as the strategy beats the SP500, we consider it compliant. The cumulative amount of time you are “certified” increases. Later, when it comes time to pay you money for your strategy, we run a calculation: “How many days was it fully certified?” and we pro-rate your payment based on this.
So, just to take a simple example:
Imagine suddenly on day 90, we look at your strategy and see it is not quite outperforming the S&P over the past 60 days. Nothing irrevocable happens. Your strategy is still in the C2Star program. Perhaps after 10 days or so, performance improves (or the SP500 tanks!) and now suddenly, your 60-day-lookback performance is beating the SP500 as required. Well, later, when we do the accounting and pay you for your performance, our software basically notes, “Hey, there was a 10-day period in there where the strategy wasn’t fully certified, so payment is reduced accordingly. But the strategy is still in the program.”
Now, contrast this with a violation of risk controls. Again, a simple example: On day 85, you lose $29,000. That’s it. Once you violate a loss constraint, the strategy is kicked out of the program. (You’ll still be paid for performance achieved before that date.)
In summary, there are two classes of C2Star requirements. One set are red-line risk/loss controls. Violate those, and the strategy is out of the program.
The other set are “minimum performance” stats such as “Must exceed SP500 by 1% over rolling period” – if you violate this, no sweat – you’re still in the program and can regain full certification as your performance improves again.