Drawdown

Drawdown measures the decline from a portfolio’s peak value to its lowest point before recovery. It represents the magnitude of losses investors experience during downturns. Maximum drawdown is a key risk metric, often more meaningful than volatility because it reflects real capital erosion. Large drawdowns can have lasting psychological and financial impacts, making recovery difficult. Quant strategies therefore prioritize drawdown control through diversification, regime filters, and risk limits. Understanding drawdowns helps investors set realistic expectations and design portfolios aligned with their risk tolerance. Reducing drawdowns improves long-term compounding by preserving capital during adverse periods.