Drawdowns and Risk

In the NilssonReport we calculate the average current drawdown that the universe of reporting managers is experiencing. To refresh your mind, the drawdown is a measure of risk, showing the loss that an investor has suffered if he would have invested at the most recent equity peak. Typically, drawdowns are proportional to the standard deviation and the skill of the managers.

Calculating the drawdown involves two steps, first calculate the index level and then calculate the maximum distance to the most recent high. Thus, drawdown is a path sensitive measure.

Above is a styled example, using on the managers in the database. Here a manager that shut down in March or April 2018, showing the maximum drawdown and the current drawdown points. In our report, we show the current drawdown.

Looking across the whole universe of managers, we see that risk (here standard deviation) is approximately proportional to the drawdown but that there are some outliers. Typically, for some managers, we observe drawdowns that are multiple of standard deviations. In some cases, there are managers that are still running capital that has lost most than 90% of the money.

This data is available in the NilssonReport.

The report can be accessed here. Sign up for the underlying database here (free).



Categories: NilssonHedge

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