Maximum Drawdown
Maximum Drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. It is a vital measure of capital preservation and tail risk.
The Asymmetry of Loss
Drawdown analysis is critical because of the mathematical asymmetry of compounding returns. A loss requires an exponentially larger gain to return to breakeven.
| Drawdown % | Gain Required to Recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100.0% |
| 75% | 300.0% |
For institutional allocators (endowments, pensions) who have fixed annual distribution requirements (e.g., 5% withdrawal), a severe drawdown combined with mandatory withdrawals can trigger a "death spiral" where capital recovery becomes mathematically impossible.