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Maximum Drawdown as Portfolio/Strategy Performance Metric

May 14, 2020 • Posted in Big Ideas

How should investors think about maximum drawdown (MaxDD) as a portfolio/strategy performance metric? In their April 2020 paper entitled “Drawdowns”, Otto Van Hemert, Mark Ganz, Campbell Harvey, Sandy Rattray, Eva Martin and Darrel Yawitch examine usefulness of MaxDD for portfolio/strategy performance evaluation. They first quantify how MaxDD relates to key return statistics based on 100,000 simulations of monthly returns for each variation. They then investigate use of MaxDD for detecting portfolio/strategy failure due to strategy crowding or other market changes. Finally, they assess MaxDD-based rules for portfolio risk reduction. Using pure simulations and simulations based on actual U.S. stock market monthly returns since 1926, they find that: (more…)

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