![]() We use maximum drawdown as one of the key statistics for evaluating our quantitative investment strategies and for deciding on the introduction of new variables in our models. A portfolio is often subject to a maximum drawdown constraint, meaning that, at each point in time, it cannot lose more than a fixed percentage of the maximum. Most investors would strongly prefer the first strategy, because it has a much lower maximum drawdown than the second strategy! Furthermore, the length of the drawdown period is shorter. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.įor example: two strategies can have the same average outperformance, tracking error, information ratio and volatility, but their maximum drawdowns compared to the benchmark can be very different.įor instance, suppose that the first one achieves a monthly performance of 1%, -0.5%, 1%, -0.5% and so on versus the benchmark, while the second strategy achieve an outperformance of 1% each month during the first half of the sample, but an underperformance of 0.5% each month during the second half of the sample. (1 min) If you hear the term ‘drawdown’ applied to your investments, it means you lost money. A drawdown is a persistent decrease in price over consecutive days from the last price maximum to the next price minimum. You have to be aged 55 or over and have a defined contribution pension to access your money in this way. A stock market crash is a sharp and quick drop in total value of a market with prices typically declining more than 10 within a few days. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. Dotcom Bubble: The dotcom bubble occurred in the late 1990s and was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies. Income drawdown, or pension drawdown, is a way of taking money out of your pension to live on in retirement. ![]() ![]() It is usually quoted as a percentage of the peak value. A correction is a 10 percent drop in stocks from their most recent high. Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. ![]()
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