Maximum Drawdown
The largest percentage decline from a prior peak NAV to a subsequent trough — the standard measure of the worst loss an investor would have experienced.
Definition
Maximum drawdown measures the largest peak-to-trough decline in a fund's NAV over a given period, expressed as a percentage of the peak. It answers a concrete, experiential question that volatility and VaR do not: if an investor had bought in at the worst possible moment before this fund's worst stretch, how much of their capital would they have seen disappear before things turned around?
The calculation tracks a running peak NAV as time progresses. At every point, the fund's current drawdown is how far the current NAV sits below that running peak; the maximum drawdown is simply the deepest of those readings over the whole period. Crucially, the running peak only ever moves up when a new high is set — a partial recovery does not reset it, and the recorded maximum drawdown does not improve just because the fund later recovers.
Maximum drawdown is a backward-looking, realized statistic — unlike VaR, it makes no probabilistic claim about the future. It says "this is the worst decline that has actually happened" rather than "here is a statistically likely bound on future losses," which makes it easier to interpret but also means a fund with a short track record may simply not yet have lived through its true worst-case drawdown.
Why it matters
Two funds can post identical annualized returns while one endured a shallow, brief dip and the other suffered a severe, prolonged collapse before recovering — maximum drawdown is what distinguishes them, and it correlates directly with the psychological and practical experience of holding through a bad stretch, including the risk of investors redeeming near the bottom.
Drawdown also interacts directly with fee mechanics: a fund cannot earn a new performance fee until NAV recovers back above its prior high-water mark, so the size and duration of a drawdown determines exactly how long a manager goes unpaid on performance fees before the fund reaches new highs again.
Maximum drawdown
The result is naturally negative or zero (a fund that only ever sets new highs has a maximum drawdown of 0%). Some reports quote the absolute value as a positive percentage ("a 21% maximum drawdown") — either convention is standard as long as it is stated consistently.
Tracking the running peak through a NAV path
A fund's NAV per unit moves $100 → $112 → $95 → $101 → $88 → $107 across six observations. The running peak starts at $100, rises to $112 at the second observation, and then stays at $112 for the rest of the path because no later observation exceeds it (the final $107 does not set a new high).
Drawdown at each point is measured against that running peak of $112: at $95 it is (95−112)/112 = −15.18%; at $101 it is −9.82%; at $88 it is (88−112)/112 = −24/112 = −21.43% — the deepest reading in the series; at $107 it is −4.46%. The maximum drawdown for the whole path is therefore −21.43%, running from the $112 peak down to the $88 trough — and it stays recorded at −21.43% even after NAV recovers to $107, because the statistic measures the worst decline that occurred, not the fund's current state.
| NAV | Running Peak | Drawdown |
|---|---|---|
| $100 | $100 | 0.00% |
| $112 | $112 | 0.00% |
| $95 | $112 | −15.18% |
| $101 | $112 | −9.82% |
| $88 | $112 | −21.43% (max) |
| $107 | $112 | −4.46% |
Common mistakes
Measuring drawdown from the fund's inception NAV rather than the running peak — a fund that rose 50% before falling 30% has a maximum drawdown of −30% from its own peak, not a comparison against where it started.
Assuming a recovery back to the old peak erases the maximum drawdown statistic — the metric records the worst decline that occurred over the period and does not improve retroactively once NAV recovers.
Comparing maximum drawdown figures computed over different lookback windows (trailing 90 days versus since-inception) as if they measure the same thing — a longer window can only reveal a drawdown at least as deep as a shorter one.
Conflating maximum drawdown with VaR — drawdown is a realized, backward-looking statistic about what actually happened; VaR is a forward-looking probabilistic estimate. A fund can have a low historical drawdown and still carry high VaR if its current positioning has changed.
Ignoring drawdown *duration* alongside depth — two funds with the same −20% maximum drawdown can differ enormously in how many months it took to recover, which matters as much to an LP as the depth of the decline itself.
In practice
Crypto NAV paths tend to produce sharper, faster drawdowns than traditional strategies — a fund holding spot crypto through a market-wide deleveraging event can see a double-digit drawdown within days rather than months, which is one reason drawdown-based risk alerts are typically set on a rolling short window (for example, the last 90 days) rather than purely since-inception.
Nyx Fund's risk alerts monitor drawdown against a rolling 90-day NAV peak and fire once, without repeating, while the fund remains below a configured threshold — giving managers an early, non-spammy signal the moment a drawdown crosses a line worth acting on, and the fund's live dashboard computes maximum drawdown directly from the shadow NAV history alongside annualized volatility and Sharpe ratio.
Questions, answered
What is a good maximum drawdown for a crypto fund?
There is no universal benchmark — it depends heavily on strategy and volatility target. A market-neutral strategy might target single-digit drawdowns, while a directional spot-crypto strategy can see drawdowns ranging from mid-double-digit percentages to well beyond during broad market corrections, depending on leverage and volatility target. Context and recovery time matter as much as the raw number.
How is maximum drawdown different from volatility?
Volatility measures the typical dispersion of returns around their average, in both directions. Maximum drawdown measures one specific thing: the single worst decline from a prior peak. A fund can have moderate volatility overall but still suffer a severe drawdown if its losses cluster in one direction.
Does maximum drawdown reset after a fund recovers?
No. Maximum drawdown is a historical record of the worst decline that occurred over the measured period. A full recovery to new highs does not erase or improve a previously recorded maximum drawdown figure — it only means the fund is no longer currently in a drawdown.
Why do drawdowns matter for performance fees?
Most funds pay a performance fee only above a high-water mark, so a fund cannot earn a new performance fee until NAV recovers back above its prior peak. A deeper drawdown means a longer stretch with no performance fee accruing, regardless of how the manager is otherwise trading.
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