Whatâs an acceptable max DD for a strategy?
- Thread starter macintash
- Start date
For one of my first outside investors, who had put in something like $250k (roughly 10% of the fund)... I promptly lost 12% for him 2 weeks into his new investment.
I was... name it: humiliated, distressed, agonized. But I wrote him an email immediately explaining the loss, and giving him the option to pull out his investment at the end of the month (instead of 45 day redemption notice). And if he had taken me up on it, I really think I might have gotten out of the business and gone back to investing my capital exactly as you said.
But he said exactly the right things. He told me he selected me for the long term, that he would evaluate me as a manager a year later, that he trusted me to stick to my risk management.
That story had a happy ending (so far!), as I've made him quite a bit of money in the past 2.5 years. But it could very easily have gone the other way. There were at least 3-4 times in the first 2 years where I seriously wanted to run away and hide.
One of my local Chicago CTA clients confided in me that during the course of the 2008 crash, he had a drawdown of like 3% as I recall and he still got hammered with redemptions. Just big investors needing cash. When he told me that story I later checked the Barron's CTA performance metrics and my impression was that he had fared better than most during that period. But he still lost about 90 % of his AUM. Had nothing to do with his fund's performance per se - just big investors who desperately needed cash for margin calls elsewhere and they went to the managed account with the quickest liquidation terms.