Maximum Drawdown
Maximum drawdown is the largest peak-to-trough decline in value over a period.
Allocator relevance: High — a “pain metric” that captures tail experience and path dependency, especially in stress regimes.
Expanded Definition
Max drawdown measures the worst historical loss from a prior peak before recovery, capturing the severity of adverse paths rather than average variability. It differs from “drawdown” used in fund cashflow contexts (capital calls). For private assets, measured drawdowns can be understated due to low-frequency reporting and appraisal smoothing, so allocators interpret max drawdown alongside valuation methodology and data frequency.
Decision Authority & Governance
Governance includes valuation frequency, smoothing disclosure, methodology consistency, and stress testing. Allocators assess whether reported drawdowns align with market conditions and whether the manager provides transparent performance analytics.
Common Misconceptions
- Max drawdown equals volatility.
- Low historical drawdown guarantees safety.
- Private markets have low drawdowns by nature.
Key Takeaways
- Max drawdown captures worst loss path, not average risk.
- Reporting frequency can understate true drawdowns.
- Pair with stress tests and liquidity analysis.