Measuring and surviving drawdowns

The three dimensions

Depth alone is an incomplete description. Two strategies with identical maximum drawdown can be entirely different experiences depending on how long the decline lasted and how long recovery took.

• Depth — the maximum peak-to-trough percentage decline.
• Duration — how long equity spent below the previous peak.
• Recovery — the gain required, and the time taken, to reach the prior peak again.

The recovery asymmetry

Losses and gains are not symmetric. A 20% decline needs 25% to recover, a 33% decline needs 50%, and a 50% decline needs 100%. Beyond roughly half the account, recovery stops being a matter of patience and becomes a matter of taking more risk — which is how drawdowns become terminal.

This asymmetry is the entire argument for leverage caps and notional ceilings. Their purpose is not to smooth the equity curve cosmetically; it is to keep the account inside the region where recovery is arithmetically plausible.

What a basket changes

A score-weighted basket in isolated sub-accounts reduces the chance that one leader's drawdown defines the account's drawdown. It does not reduce drawdown when leaders are correlated, and in a liquidation cascade correlation tends to rise sharply.

The honest framing is that diversification changes the shape of the distribution, not its floor. Any leveraged perpetual exposure retains the possibility of severe loss.

Deciding your own tolerance

Before allocating, decide what decline you would hold through and what decline would make you stop. Deciding in advance is the only version of that decision that is not made under stress, and it should be based on the risk disclosure rather than on any historical figure.

Past performance is not indicative of future results. Perpetual futures are leveraged instruments and carry a substantial risk of loss, including the loss of your entire position.