Drawdown
The fall from peak to trough. How much you lost before recovering, and how long it took.
Drawdown measures the decline from a portfolio’s peak to the lowest point before a new peak is reached : answering two questions total return hides: how much did you lose at the worst point, and how long did the pain last? A 25% drawdown requires a 33% gain just to recover. A 50% drawdown requires 100%. This asymmetry is why drawdown control matters more than return maximization: the deeper the hole, the exponentially harder it is to climb out. Maximum drawdown (MDD) is the single worst peak-to-trough decline in history : the worst experience an investor endured.
How It Works
Track running peak value → compute current value / peak − 1 → MDD = minimum of all these values. Recovery time = bars from trough until a new all-time high.
Example
During v13 tail risk recalibration, Monte Carlo simulations revealed the unconstrained strategy had expected MDD of 18% during Hormuz escalation scenarios. Position sizing was adjusted to cap MDD at 12% under the 95th-percentile worst case. Detailed in Oil v13 Tail Risk Recalibration.