A drawdown is the peak-to-trough decline in the value of an asset, portfolio, or strategy over a specified period, measured as a percentage from a prior high. Maximum drawdown captures the worst such loss, serving as a core gauge of downside risk and capital impairment between successive peaks.
How it works
Drawdown is computed as (trough value − prior peak value) / prior peak value, expressed as a negative percentage; the running maximum drawdown is the deepest such trough across the period. Unlike volatility, it is path-dependent and asymmetric — it captures the actual loss of capital an investor would suffer holding through the worst stretch, and the recovery required to reclaim the high (a 50% drawdown needs a 100% gain to break even).
Why it matters now
In the 2025-2026 melt-up regime, headline indices grind higher while drawdowns concentrate in pockets — crypto, unprofitable SaaS, and precious metals — making cross-asset drawdown dispersion a cleaner read on where risk is actually being repriced than aggregate index levels.
Example
An asset that climbs to 100, falls to 65, then recovers registers a 35% drawdown; reclaiming the 100 peak from 65 requires a 54% rally. A portfolio with a 20% maximum drawdown over a cycle lost a fifth of peak capital at its worst point, independent of its final return.
Frequently asked
- What is a drawdown?
- A drawdown is the peak-to-trough decline in an asset, portfolio, or strategy's value, measured as a percentage from a prior high. It captures the actual capital loss an investor holding through the worst stretch would suffer. Maximum drawdown is the deepest such trough over a period, and unlike volatility it is path-dependent and asymmetric.
- How is maximum drawdown calculated?
- Maximum drawdown is the largest (trough − prior peak) / prior peak across a period, expressed as a negative percentage. You track the running peak, measure each subsequent decline from it, and keep the worst. A series rising to 100, falling to 65, then recovering registers a 35% maximum drawdown regardless of where it ends.
- Why does a 50% drawdown require a 100% gain to recover?
- A 50% drawdown requires a 100% gain because recovery math is asymmetric: losses shrink the base that subsequent gains compound from. Falling from 100 to 50 means a 50 base must double to reclaim 100. The recovery gain is 1/(1 + drawdown) − 1, so deeper drawdowns demand disproportionately larger rallies.
- How does drawdown differ from volatility?
- Drawdown measures realized peak-to-trough capital loss, while volatility measures the dispersion of returns around their mean. Volatility is symmetric and path-independent; drawdown is asymmetric and path-dependent, reflecting what an investor actually lost holding through the worst stretch. Two strategies can share identical volatility yet have very different maximum drawdowns.
- Why does drawdown dispersion matter in a melt-up regime?
- Drawdown dispersion matters in a melt-up
Glossary · melt-up
A melt-up is a rapid, self-reinforcing surge in risk-asset prices driven by momentum, positioning, and fear-of-missing-out rather than improving fundamentals. Valuations expand as price-insensitive and trend-following flows chase a rising tape, the mirror image of a panicked sell-off or meltdown.
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Glossary · SaaS
SaaS — Software-as-a-Service — is the cloud-delivered software business model in which applications are licensed on recurring subscription rather than perpetual sale. In market parlance, "SaaS" denotes the basket of high-multiple, growth-oriented software equities whose valuations key off forward revenue growth and the level of long-end rates.
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