Risk
Maximum drawdown
Also called Max DD
The largest peak-to-trough fall a portfolio or strategy suffered over the period examined.
How it works
It answers "what is the worst this has put someone through", which is the question a return figure never answers.
Two strategies with identical returns and very different maximum drawdowns are not equally good. The one with the deeper hole is the one more people abandon before the return arrives.
Where it misleads people
Maximum drawdown depends entirely on the window measured. A backtest starting after the last crash reports a flattering number that says nothing about how the strategy behaves in one.
Related terms
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
- Recovery periodHow long it took a portfolio to climb back to its previous peak after a fall.
- BacktestRunning a strategy over historical data to see what it would have done.
- Calmar ratioAnnualised return divided by the worst drawdown — return per unit of pain.
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