why don't the funds keep a maximum montly drawdown?

Discussion in 'Trading' started by ADX_trader, Dec 10, 2002.

  1. I think if the funds keep a maximum montly drawdown, their reports would be much more impressive. Actually, no one know what they do, the public just know their results from the reports. After lossing 10 or 15%, stop trading for the month. If they got a month with 30 or 40% drawdown, it would scare many potential clients. Just like the discussion of quadriga in other thread. Its past performances are quite good. But in Oct they hit the wall and made many people start to suspect their ability.
  2. This idea is actually used often in the long term. There are a number of firms that have a built in stop to shut the company down after x% of initial capital is lost. On a monthly basis though, funds may not want to be limited to a maxdd in that time frame. If the monthly dd's are too large, position sizing most likely has to change.

    At what point would/do you shut down your fund for the month?
  3. I'm not sure if you are referring to mutual funds or hedge funds, but the latter are under extreme pressure to limit drawdowns. That's because the incentive portion of their compensation is invariably based on a high water mark. Have too big a drawdown and you cannot earn the incentive fee, then you cannot pay your people bonuses and you are basically out of business.
  4. It can also be the contrary. They can push the risk to the maximum since they use other's people money, because if they lose, they lose nothing, and the whole risk is for the client. In fact if they lose, they just can create another fund unless they already have several eggs in many baskets :)

  5. "A trader according to the Chicago legend, 'made 8 million in eight years and lost 80 million in eight minutes'. According to the same standards, he would be, 'in general', and 'on average' a good risk manager."

    Nassim Taleb,

    in DerivativesStrategy 'The Jorion-Taleb Debate'