How to calculate maximum drawdown - is it assets or return?

I had always assumed that “drawdown” refers to the level of assets (after making allowances for inflows and outflows beyond the manager’s control.). E.g. a hedge fund starts the year with $100M. Investors withdraw $20M on March 1. Hedge fud value is $50M on June 1 (low point for the year.) So maximum drawdown = $30M. Right?

Following passage makes it seem like it’s the rate of return. E.g. if the above hedge fund is worth $100M on Jan 1, Feb 1, March 1 (before withdrawal), and then $80M, and worth $55M on Apr 1, $53M on May 1, $50M on Jun 1; then maximum drawdown = $80M - $55M = $25M/month. Which one is right?

"Drawdown, in the field of hedge fund management, is defined as the difference between a portfolio’s maximum point of return (known in industry parlance as its “high-water” mark), and any subsequent low point of performance. Maximum drawdown is the largest difference between a high-water and a subsequent low. " Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons (P&T), 6/18/2012. page(250).

it is the value of the assets - which also works out to be a return.

Thanks CPK,

so you would agree that the drawdown for the hedge fund is $30M, no matter how long it took, right?

there is 2 different thing.

first is MAXIMUM Drawdown. This is the difference between the highest high point of your asset and the lowest low point of your assets ( excluding CFs effect ) . There is no such thing as a time frame for a max DD, it can be 1 week spike, can be 2 years slow trend down and even a 100 year trend down.

second is if they ask for the Drawdown during a certain period , in this case you just have to check the highest high of the period and the lowest low of the period.

remember that your highest high AS TO BE before your lowest low to be a drawdown.

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I thought max drawdown was the biggest difference between a CONSECUTIVE high and low. so if the fund is worth $100 in jan, $50 in feb, $40 in march, the max drawdown is $50.

It is meant to measure the volatility of the fund returns right? so I would have thought the time periods need to be taken into account. eg a fund that starts with $100m and loses $1m each month for 10 months would have a lower drawdown (thus less volatility) than a fund that started with $100m, lost $10m the first month then lost nothing for the next nine months.

no, maximum DD is not a volatility measure and not its the peak - bottom no matter how many up/down swing in between.

Schweser disagrees with you - p97 of book4 if you have it. The graph shows the max DD as being between two consecutive points (not from the global maximum to the global minimum). They also say ‘RoMAD is similar to the Sharpe and information ratios, as all three measure average return as a percentage of the risk faced in earning it’