Drawdowns-the bane of Asset Managers
Whilst many measures exist to help evaluate and compare trading performance, and we have already discussed some of the most common (see: Obsidian’s Portfolio Management System improves Ratios:
https://obsidianaiadvisors.com/news/obsidians-portfolio-management-system-improves-ratios ),
the fact remains that asset managers are most concerned with Drawdowns.
Given that overall performance, and often compensation, is tied to the High-Water Mark it is no surprise that returns relative to this point are very important. Any investment strategy which minimises this spread will be sought after, notwithstanding any other measure in which it may not prevail. If it can achieve this without compromising too much upside performance, then the Asset Manager is getting close to the Holy Grail of investment.
Obsidian’s Portfolio Management System reduces both the level of drawdowns and the length of time the Portfolio is ‘under water’. The following example highlights the performance of our Obsidian-Russell Portfolio against the IWM, which is the Russell 2000 ETF:
The graphs show the rolling Drawdown (in red) and the Portfolio value (in blue) for the Obsidian-Russell and IWM respectively.
The tables show the number of days and percentage of the number of total trading days that each Portfolio is below the prevailing High-Water Mark.
Take away points:
Obsidian-Russell’s worst loss over almost seven years is -6.3% compared to -27.3% for the IWM
Obsidian-Russell’s performance was below -6% for only one day, and below -5% for only five days, out of 1717.
Obsidian-Russell only spent 5% of the trading period below -2%.
IWM spent 38% of the time below -6%, and 24% below -10%.
Obsidian achieves this through judicious capital allocation within the its Portfolio Management System, based on true Machine Learning.