Drawdown
A drawdown is the decline from a portfolio’s peak value to a subsequent low point over a given period.
Allocator relevance: A practical measure of downside experience that shapes risk limits, liquidity planning, and mandate suitability.
Expanded Definition
Drawdown captures how painful losses can be, not just how volatile returns are. Two strategies can have similar volatility but very different drawdown behavior depending on liquidity, leverage, and correlation in stress regimes. In private markets, drawdowns may appear delayed due to valuation lag, but economic drawdown risk can still be real.
Allocators often care about maximum drawdown and “time to recovery,” especially when matching portfolios to spending needs or capital call obligations.
How It Works in Practice
Allocators monitor drawdowns at the total portfolio level and within sleeves (public, privates, credit). They also stress test drawdown scenarios using correlation and factor assumptions, and they evaluate manager behavior in prior drawdowns via track record and reference checks.
Decision Authority and Governance
Risk budgets and limits often include drawdown thresholds and escalation rules. Governance determines when rebalancing occurs, when exposure is reduced, and how liquidity sleeves are managed to fund commitments during drawdowns.
Common Misconceptions
- Low volatility means low drawdown risk.
- Private markets don’t have drawdowns because marks are smoother.
- Drawdowns are only relevant to public markets.
Key Takeaways
- Drawdown measures lived downside, not just variability.
- Stress regimes change correlations and can deepen drawdowns.
- Liquidity planning should assume drawdowns can coincide with capital calls.