What is Maximum Drawdown, and what does it tell me?
Maximum Drawdown (Max DD) is the largest peak-to-trough decline a strategy has experienced over its history — measured from a peak (high-water mark) down to the lowest point that followed it. It is expressed as a negative percentage. A Max DD of −15% means the strategy fell 15% from its peak before recovering.
It answers a pointed question: what is the worst loss an investor in this strategy would have had to endure — how bad did it get before things turned around?
How it is calculated
DMS computes Max DD on a month-end basis using the strategy's full return history. At each month-end, it looks at how far the strategies and benchmarks have fallen from previous month end highs. The largest of those declines across the entire history is the Max DD figure.
Because DMS strategies are evaluated monthly, the Max DD reflects month-end to month-end moves. Daily Max DD is generally around 1.5x higher than month end drawdowns; however, we compare strategies and benchmarks all on month end basis so it is an equal comparison.
What it is useful for
Max DD is one of the most honest stress-tests available for a strategy. It tells you: this is the real-world pain that an investor would have experienced at the worst moment in the strategy's recorded history. Paired with the Max DD Recovery metric — which shows how long it took to get back to the prior peak — it gives a sense of both depth and duration of the worst episode.
For comparison, the S&P 500 has experienced drawdowns exceeding 50%, and a traditional 60/40 portfolio has seen drawdowns around 32%. DMS strategies are designed with low drawdowns as a central goal, not an afterthought.
What it does not tell you
This is the most important thing to understand about Max DD: it is a historical figure, not a guarantee of maximum future drawdowns.
The Max DD shown is the worst drawdown the strategy has experienced to date, based on the specific market environments in the backtest and live history. It is not a promise, a guarantee, or a prediction of the worst that could ever happen. As Meb Faber so aptly has said: your largest drawdown is still to come.
Max DD and the date range selector
In DMS, the Max DD shown in the Metrics view reflects the currently selected date range, not necessarily the full history. If you narrow the date range to the last five years, you will see the worst drawdown within that period of time — which may be smaller than the all-time Max DD if the worst episode occurred outside the selected period. For the full-history figure, use the maximum available date range for each strategy.
Pairing Max DD with other risk metrics
Max DD captures the single worst episode but says nothing about how often or how persistently a strategy draws down. Two strategies can share the same Max DD while feeling very different to hold — one might recover quickly, another might grind sideways for years. For a fuller picture of drawdown behavior, pair Max DD with:
- Ulcer Index — captures both the depth and duration of all drawdowns, not just the worst one
- Max DD Recovery — shows how long the worst drawdown took to fully heal
- Sortino Ratio — measures return per unit of downside risk