Largest Losing Month and Drawdown
This measure calculates the largest
cumulative loss on a hedge fund portfolio. In the example in Table 7.1, the
largest loss was 5.8 percent. Usually, these loss statistics are calculated
from inception, so if additional performance data was available, it would
also be analyzed to find a larger loss.
In addition, if an additional loss occurs before an earlier loss is made
back, the cumulative effect of the losses is measured as a drawdown. Table
7.3 extends the performance calculations from Table 7.1 and Table 7.2 and
demonstrates one way that the drawdown can be calculated.
The monthly returns and the wealth relative columns in Table 7.3 are
the same as they appeared in the previous tables. The new column labeled
"High-Water Mark" preserves the previous wealth relative after a loss. (If
the net asset value of the hedge fund is known, that value may be substi-
tuted for the wealth relative values because these wealth relatives are just
normalized net asset values.) The column labeled "Drawdown" measures
the cumulative loss from the previous high-water mark.
Months to Earn Back Loss
Another measure of risk is to track the number
of months before a loss is made up by later gains. In our sample data, the
loss in February lasted only one month because the gain in March restored
the value of the fund to levels greater than the value at the beginning of
February. The loss in July lasted two months. The loss that began in Octo-
ber has stretched to three months and continues to be a loss period.
Investors look at a variety of statistics related to these measures of
time. How long did it take to recover the largest monthly loss? What was
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HEDGE FUND COURSE
TABLE 7.3

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