Drawdown Measures: Are They All the Same?

Abstract

Over the years, a diverse range of drawdown measures has evolved to guide asset management. The authors show that almost all of these measures fit into a unified framework. This new framework simplifies the implementation of drawdown measures and improves an understanding of their similarities and differences. Conceptual differences between drawdown measures translate into different rankings of portfolios, which the authors document in a simulation study. Their research also shows that all drawdown measures can (to some degree) discriminate between skillful and unskillful portfolio managers, but differ in terms of accuracy. However, the ability to detect skill does not easily improve performance ratios where drawdown measures serve as the denominator. In conclusion, this article shows that the choice of an adequate drawdown measure is vital to the assessment of investments because different measures emphasize different aspects of risk.