Drawdown

Definition

Drawdown measures the magnitude of loss from a portfolio’s prior peak to its subsequent trough. It captures the investor experience of losses and is often more intuitive than volatility. Maximum drawdown and recovery time are important for understanding whether a strategy can be held through stress without forced selling or governance pressure. Allocator Context Allocators evaluate drawdowns to assess downside exposure, liquidity risk, and behavioral feasibility. Institutional allocators often have drawdown tolerance ranges and may reduce exposure if a strategy breaches expected downside behavior. For illiquid strategies, drawdowns can be hidden by valuation lag, so allocators focus on stress-testing and underlying economic exposures. Decision Authority Drawdown expectations inform risk limits and committee oversight. Severe drawdowns can trigger re-underwriting, manager watchlists, rebalancing actions, and in some cases redemption or non-re-up decisions. Why It Matters for Fundraising Managers should present drawdown behavior honestly, including what caused it and how the strategy is designed to respond. Allocators care about whether the downside is explainable, whether the manager remained disciplined, and whether the strategy still fits portfolio role. Key Takeaways Drawdown captures real downside experience Recovery time matters alongside magnitude Illiquid marks can mask economic drawdowns Downside clarity increases allocator trust