Every few years, someone discovers Jason Kelly's “Signal” system and tells us we should list it on BestFolio. The pitch is seductive: a mechanical rebalancing rule, a stock-plus-bond sleeve, and backtests that look like a money-printing machine - 21.1% CAGR for the 9% variant. That is not a typo. Twenty-one point one percent per year, for decades, beating almost every institutional quant shop in the world.
We implemented it. We backtested it. And then we made a decision that surprised a few readers: we quietly marked all three Kelly variants as admin-only and refused to show them to Pro subscribers. This post explains why.
What Kelly's Signal actually is
The 3Sig/6Sig/9Sig system works like this: you hold a portfolio of stocks and bonds. Each quarter, you check whether your stock sleeve has grown by a target amount (3%, 6%, or 9% per quarter, depending on the variant). If stocks grew more than the target, you sell the excess and move it to bonds. If stocks grew less - or dropped - you pull money from the bond sleeve and buy more stocks. The bond sleeve acts as a reservoir that feeds the stock sleeve during drawdowns.
On paper, this is elegant. It is a form of mean-reversion rebalancing that forces you to buy low and sell high. The backtests BestFolio ran on our own walk-forward infrastructure confirm the returns marketed to retail readers:
- 3Sig (conservative): 10.4% CAGR, -52.9% max drawdown, Sharpe 0.64
- 6Sig (moderate): 16.3% CAGR, -85.5% max drawdown, Sharpe 0.59
- 9Sig (aggressive): 21.1% CAGR, -99.3% max drawdown, Sharpe 0.62
Notice something important: the Sharpe ratio does not improve as you dial up the aggression. It peaks at the conservative 3Sig (0.64) and degrades slightly through 6Sig (0.59) and 9Sig (0.62). Moving from 3Sig to 9Sig nearly doubles the max drawdown and pushes annualized volatility from roughly 18% to over 60%, but the risk-adjusted return is flat. You are paying a steep tail-risk premium for zero compensation on the metric that actually matters.
Read those drawdowns again. The aggressive variant loses ninety-nine percent of portfolio value at its worst. An investor who started with €100,000 would see their account at €660 at the bottom, not a drawdown but a near-total wipeout. Even the “conservative” version loses more than half. These are not numbers that belong on a strategy marketed to retail investors as “the perfect portfolio.”
The flaw: a closed system that pretends to be open
To understand why 9Sig’s backtest looks incredible while its drawdown looks catastrophic, you have to think about what the strategy actually does during a long bear market.
In a short, sharp correction - the kind we saw in March 2020 or December 2018 - the Kelly rule tells you to pull money from bonds and buy stocks on the dip. When stocks rebound, the bond sleeve is refilled from the gains. The round trip completes. It looks genius. This is the pattern that dominates the modern backtest window.
In a long, grinding bear market - think 2000-2002, 1973-1974, or the Great Depression - the rule tells you to keep pulling from bonds, quarter after quarter, as stocks drop another leg, and another, and another. By the time stocks bottom, the bond sleeve is empty. You are then fully allocated to stocks at the worst possible moment, with no reservoir left to execute the strategy’s entire thesis. The rebalancing rule has silently turned into “be 100% in stocks after an 80% drawdown, with no dry powder.”
Worse: the bond sleeve never comes back. There is no mechanism in the strategy to refill the reservoir once it is drained. Kelly’s book waves at this with vague advice to “add new cash” from your paycheck. That is not a strategy. That is telling the reader to bail the boat while claiming the boat doesn’t leak.
Why the backtests look amazing anyway
The 9Sig headline number - 21.1% CAGR - is not fake. It is the arithmetic consequence of a portfolio that does recover from the drawdown, because the backtest window happens to include the dot-com recovery, the 2009-2020 bull market, and the 2020-2021 pandemic rally. Compounding off a 5% base with 20%+ equity returns for a decade produces eye-watering CAGR numbers. It is the mathematics of survivors.
The problem is that Kelly’s system nearly did not survive. A -99% drawdown is one broker margin call, one panicked email to your advisor, one medical emergency, or one job loss away from being permanent. Any investor who needed liquidity during the 2008-2009 trough was forced to sell at the exact bottom, turning the paper drawdown into a realized loss. The backtest quietly assumes you never needed a single euro during that period. Real investors do not have that luxury.
This is the core issue that gets lost in CAGR comparisons: a strategy that theoretically returns 21% per year but requires you to weather a 99% drawdown is not a viable investment product for anyone with an emergency fund smaller than their portfolio. It is a thought experiment dressed up as a retirement plan.
What good TAA looks like instead
The strategies on BestFolio’s public leaderboard - GEM, HAA, VAA, KDA, AlphaOne, Dynamic Macro Allocation - all share a property Kelly’s system lacks: they have an exit. When the trend turns, they go to cash or bonds and wait. They do not pull from a reservoir that can be emptied. They do not double down into oblivion. The typical max drawdown across our tactical catalog clusters around -20% to -25% (median -23%), with most strategies between -15% and -35%, not -99%.
Those strategies have lower theoretical CAGR than 9Sig in a cherry-picked backtest window. They also keep investors solvent in 1974, 2002, 2008, and any future bear market that lasts longer than a few quarters. That trade-off is not a bug - it is the entire point of tactical allocation.
Why we publish this instead of just hiding it
Refusing to list Kelly’s signals on our leaderboard is not enough. The system is still sold in books, promoted in YouTube videos, and recommended on Reddit threads as “the perfect retirement strategy.” Readers who get curious and run the numbers deserve to see what we saw.
That is why we built a public rejection log: a permanent record of strategies we implemented, tested, and chose not to offer, with the exact metrics and the reasoning behind the decision. Kelly’s Signal family is the first entry. It will not be the last.
You can read the full rejection log entry - including links to each Kelly variant so administrators can audit our backtest reproduction - at /research/rejection-log. And if you think we are wrong about Kelly, email us. We are happy to reopen the case with new evidence. What we are not willing to do is quietly put a 99% drawdown into a retail subscriber’s portfolio and call it research.
The takeaway
If a backtest looks too good to be true, it usually is. The question is always what assumption is being held constant that would break in reality? For Kelly, the assumption is that the bond sleeve is an infinite reservoir. It is not. For many other popular strategies, it is something equally silent: survivor bias in the asset universe, look-ahead in the signal construction, unrealistic transaction costs, or the quiet exclusion of 2000-2002 from the backtest window.
BestFolio’s job is to aggregate the good ones and reject the bad ones, with the receipts visible to everyone. See our methodology page for the four gates every strategy has to pass before it shows up on the leaderboard. Transparency is the only moat that matters in this space.