The False Promise of Drawdown Rules: New Evidence and a Better Framework
Abstract
Many of the world's largest money managers, such as hedge fund pod shops,
use drawdown rules to manage risk: if you are down more than X percent, you
are out. This paper demonstrates with simple examples that this kind of rule
is statistically invalid, counterproductive, and increases losses, and
proposes a better framework.
Links
Cite
@article{2025_drawdown_rules,
title = {The False Promise of Drawdown Rules: New Evidence and a Better Framework},
author = {Samir Varma},
journal = {Journal of Portfolio Management 52 (1), 145–161},
year = {2025},
doi = {10.3905/jpm.2025.1.765},
url = {https://www.pm-research.com/content/iijpormgmt/52/1/145},
}