Drawdown = a measure of risk using a fund’s highest and lowest portfolio values in a year.

The formula is: (highest value - lowest value) ➗(highest value)

Let’s say a fund’s portfolio value was $9 billion sometime in January.

Then $10 billion in March.

And $8 billion in August.

The highest portfolio value of the fund was $10 billion, and the lowest ever was $8 billion.

So, to calculate the drawdown, you would do ($10 billion - $8 billion) ➗ ($10 billion). That is $2 billion➗ $10 billion which is a 20% drawdown 📊

Notice that the actual returns of the fund don’t matter in calculating drawdown – that’s because it’s a totally different metric that should be used ALONGSIDE returns to understand a fund’s risk vs. reward.

The higher the drawdown, the riskier the fund.

These are great for investors who are okay with their portfolio going up and down a lot, as long as they get a shot at big profits!

The lower the drawdown, the less risky the fund 💚

Low risk is great if you prefer to keep money safe and are fine with sacrificing the chance to get high returns.

Now you can Google any hedge fund’s drawdown to understand how they balance risk and reward.