Drawdown Analysis
This paper is the first in a three-part series. In this paper, we will examine drawdown analysis as a performance measure. In the second paper, we will examine the impact on long-term performance of systematic risk reduction, a strategy designed to reduce drawdowns. Systematic risk reduction would be more effective if short bouts of underperformance were more likely to be followed by further underperformance. In the third paper we examine the challenge of identifying abnormal performance over short periods, and ask whether a psychological bias, what we are calling the “cold hand fallacy”, might lead us to believe that streaks of underperformance are more likely than they really are.
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