Managing Drawdowns

1.A fund's total-return index goes from 100 to 125, falls to 105, then rises to 115. What is the maximum drawdown in this window?

2.A strategy is 20% below its peak. What gain from today's level is needed to recover, ignoring new flows?

3.A fund loses 10% in one week and another 10% the next. What is its cumulative loss from the starting peak, assuming it never traded above that peak?

4.A fund reaches 110 in January, bottoms at 88 in March, and first returns to 110 in July. Which dates measure the full time underwater under a peak-to-recovery definition?

5.A fund reports a 4% loss this month and a 9% drawdown from its most recent peak. How can both be correct?

6.A fund's assets fall from $500 million to $420 million solely because clients redeem $80 million at NAV. What measure should be used to test for an investment drawdown?

7.A fund is down 8% since its peak date. Its benchmark is down 11% over those same dates. What can the manager say using an arithmetic comparison?

8.A chart compares a fund's maximum drawdown in February–June with an index's maximum drawdown in September–October. What should you compute to explain relative performance during the fund's loss?

9.A strategy fell 12% in an earlier episode and is 5% below a newer high today. Which figures describe its current and historical worst drawdowns if there was no larger decline?

10.A portfolio starts a selloff with 60% equities and 40% bonds. Equities return −12% and bonds +3%, with no trades or flows. What is the portfolio return?

11.A sector position begins at 7% of NAV and falls 30% during the drawdown, with no trades or cash flows. What is its contribution to portfolio return?

12.A portfolio loses 6.2%. The first-pass breakdown shows −4.0 percentage points from equity, −1.0 from credit, and −0.5 from FX. How should the analyst treat the remaining −0.7 points?

13.A fund's drawdown spans six weeks with a large hedge added halfway through. Why can using today's holdings to explain the entire episode mislead?

14.A leveraged fund loses sharply on a day the underlying index moves little. The risk report shows unusually large gross exposure in a spread trade. What should the review examine?

15.A fund holds 12 different issuers across four sectors. Most of the loss occurs when real yields rise. Which hypothesis deserves testing?

16.A fund's market beta rises just as its short hedge loses correlation with its holdings. What attribution would clarify the drawdown?

17.A portfolio's losses begin after a position is increased, then deepen after its thesis breaks. Which comparison best distinguishes the effects of sizing and security choice?

18.An equity sleeve falls 4% while a protective option earns 0.8% of opening fund NAV. The sleeve began at 50% of NAV. What combined contribution should the review show if there were no trades in the sleeve and no other effects apply?

19.A foreign stock loses 6% locally and its currency loses 5% against the fund's reporting currency. What is the unhedged return in the reporting currency?

20.A bond portfolio suffers a drawdown while benchmark yields fall but credit spreads widen substantially. Which analysis best explains the loss?

21.A portfolio of illiquid holdings appears to fall less than its liquid benchmark during the first days of stress. Which check matters most before concluding it is defensive?

22.A model shows a large residual loss after accounting for equity beta and rates. Several positions are short options into a volatility spike. What should be investigated?

23.A drawdown starts on an earnings miss in one holding and worsens after broad credit markets gap wider. What is the best diagnostic structure?

24.A stock's price falls 18% but the portfolio was short it throughout the episode. What should the review show before dividends, fees, and borrow costs?

25.A portfolio loses despite a hedge that pays when the market falls. Which evidence helps distinguish hedge failure from incomplete coverage?

26.A selloff causes margin calls, forcing the fund to sell otherwise liquid holdings at wide spreads. What additional driver belongs in the drawdown review?

27.The fund's daily close series shows an 8% maximum drawdown. Intraday valuation records show it was 11% below a comparable intraday peak. How should this be reported?

28.A fund peaks at 100. Its policy requires action at a 12% drawdown. It first falls to 89, then to 87. What happened at 87?

29.A fund falls from 100 to 80, then gains 10%. What drawdown remains relative to the peak?

30.A factor model explains most losses as a value tilt. The investment team argues the tilt was unintentional. What evidence helps resolve that question?

31.A portfolio underperforms its equity benchmark during a selloff. Analysis shows a larger small-cap bias than the benchmark and stable within-size selection. What should be tested first?

32.A fund's NAV loss contains a one-time legal settlement booked at a holding and a broad sector decline. What distinguishes the two in diagnosis?

33.A portfolio loses 9% from its peak. A single position contributes −4 percentage points and a shared factor contributes −3 points, but the single-position figure already includes −1 point from that factor. What combined loss do these drivers explain after removing overlap?

34.A strategy's drawdown is more severe than a stress scenario with similar index moves. What should the team compare?

35.A fund's realized losses look small because it sold some losing assets early, but remaining positions still carry large unrealized losses. Which measure should anchor diagnosis?

36.An investment committee wants the shortest accurate description of a 7% fund drawdown with a 5% benchmark loss and a concentrated credit detractor. Which opening works best?

37.A position caused the largest realized loss. Its thesis still holds, but a different position now contributes much more to the binding stress limit. Which comparison should guide a trim?

38.A stock falls 25% after its main customer terminates a contract. The thesis assumed renewal. What should the manager do before buying more?

39.A stock falls with its sector. Its orders and margins still meet the thesis, but liquidity has deteriorated. What could justify retaining it at a smaller weight?

40.A policy requires halving an active risk exposure after a breach. A long sleeve contributes +0.8 units and a hedge contributes −0.3, for +0.5 net. With the hedge unchanged and sensitivities linear, how much long exposure must be removed to halve net exposure?

41.A proposed trim cuts stress loss by 0.6% of NAV in the binding scenario and adds 0.2% of loss to another scenario. What should the manager verify?

42.A fund needs $15 million of cash for tomorrow's redemptions and holds $8 million of unrestricted cash. A sale would net $10 million but settles after the deadline. What does the manager still need?

43.A fund is forced to sell its most liquid positions to meet a margin call. What should it test immediately afterward?

44.A $12 million bond position can be sold at $3 million per day under stressed depth and participation assumptions. The manager must reduce it by $7 million in two days. What should be flagged?

45.A manager considers selling a liquid hedge to raise cash, which would increase downside exposure. What should the decision compare?

46.A long-short pair loses as the short rises sharply. Borrow gets scarce and the short may be recalled. Which action best addresses the new risk?

47.A fund is down 12% and its mandate blocks new risk at 10% drawdown until committee approval. The manager wants to buy a fallen stock. What is permitted on the stated facts?

48.A manager can eliminate an unwanted rate exposure by selling several holdings or by using a liquid futures hedge. What distinguishes the choices?

49.A fund is 14% below peak. Its absolute issuer cap is 5% of current NAV. The issuer position stayed at $4.8 million as NAV fell from $100 million to $86 million. How much must it trim to reach the cap at unchanged NAV?

50.An equity sleeve has little market beta after an index hedge. In the recent drawdown, losses came mainly from concentrated issuer news. Which change most directly reduces the identified risk?

51.A manager wants to retain a distressed bond because estimated recovery exceeds its price. What additional evidence should determine its size?

52.A holding has a strong expected payoff but triggers the portfolio's stress cap. Selling another position with the same driver would free capacity. What should the manager compare?

53.A portfolio is near a gross leverage cap after a NAV decline. A proposed hedge lowers net beta but adds gross notional. What is the next check?

54.Risk estimates spike after a market gap, but prices are unreliable and liquidity is thin. What makes a staged reduction defensible?

55.The committee approved reducing a sector overweight by 2 percentage points, and the trader filled only half the intended sales. Assuming fixed NAV and no other moves, what reduction should the manager report?

56.A fund has a current stress loss estimate of 4.8% of NAV. The committee's temporary cap is 4.0%. A proposed trade reduces the estimate by 0.6 percentage points. What remains?

57.A manager considers restoring risk after a rebound. Which evidence should guide re-entry under a plan linked to funding pressure?

58.A liquid fund and a closed-end account own the same losing asset. Which feature can lead to different trim decisions?

59.A hedge added during stress is expensive to maintain. The original exposure has since been trimmed. What should determine whether to retain all of it?

60.A fund is allowed to trim either one concentrated bond or an ETF proxy for the sector. The immediate risk is a borrower-specific downgrade. Which reduction targets that risk most directly?

61.A manager wants to sell a losing position because it has high expected transaction costs in normal markets and even worse costs in stress. Which input could justify selling only part now?

62.A fund faces a 15% drawdown trigger requiring review, while its exposures remain within all hard position caps. What is the appropriate response under a review-only trigger?

63.A position's updated scenarios show a 10% gain with 60% probability and a 25% loss otherwise. What is expected return before costs, for use in the retain-or-trim decision?

64.A fund is considering a 3% cash allocation shift into an asset expected to earn 8% more than cash. In a specified downside it loses 20% while cash is flat. What are the incremental expected return and downside impact before costs?

65.A fund can hedge the largest factor drawdown today or wait for cheaper hedges next week. What makes waiting harder to justify?

66.A book has a 2% loss allowance in a specified repeat shock. A proposed holding at 5% of NAV would lose 35% in that shock, while the rest of the book loses 0.6%. What is the maximum holding weight if losses scale linearly?

67.The portfolio's liquid sleeve hedges a less liquid sleeve in ordinary markets, but its hedge benefit vanished in the current stress. What should justify retaining the hedge?

68.A client prohibits shorting, and reducing a concentrated equity factor would require selling stocks the manager prefers. How should the manager frame alternatives?

69.A strategy with tight cash has a choice between adding a cheap security and conserving liquidity for collateral. Which calculation matters most before adding?

70.A manager plans to reduce two overlapping positions. One can be traded now, while the second requires a week. What should the trade order consider?

71.A portfolio manager cuts a 6% position to 3%. The position was responsible for half of the latest loss. Can the manager claim the next similar drawdown will be half as large?

72.A manager has two feasible plans. Plan A cuts the binding stress loss by 80 bp at high cost. Plan B cuts it by 65 bp at lower cost and still meets every limit with a buffer. What should drive the final choice?

73.A committee has two minutes for the initial drawdown update. Which opening best supports a decision?

74.A manager reports a 9% drawdown and attributes 6 percentage points to a crowded factor. Which added detail makes the attribution useful for a decision today?

75.A portfolio is down 6% from its peak. The committee approved a trim expected to cut modeled repeat-shock loss from 4% to 2.5%. What should a status update distinguish?

76.A committee asks why the largest loser was retained. Which response defends retention without relying on sunk cost?

77.A manager is proposing to exit a position whose thesis broke after a regulatory decision. What should the committee note include?

78.A committee must choose between an immediate sale and a staged sale of the same position. Which presentation best compares them?

79.A manager wants temporary authority to hold an exposure above its normal cap while unwinding. What makes the request reviewable?

80.The committee approves a trim only if stressed collateral headroom stays above $10 million. What should the follow-up report show?

81.A post-trade risk report has an unexplained 40 bp residual in the drawdown attribution. What should the committee hear now?

82.A committee member asks whether the drawdown proves the strategy has no edge. Which reply is most defensible?

83.The manager reports that a hedge lost money during a rebound after the portfolio fell. What should the committee see to evaluate the decision?

84.A committee asks why the portfolio beat its benchmark during the selloff but still triggered action. What is the appropriate explanation?

85.A risk model estimates a 3% loss in the base stress and a 5% loss if hedge correlation breaks. What wording best communicates uncertainty?

86.The portfolio has $6 million of available cash before a modeled $4 million margin call. The committee requires $3 million of cash after the call. What funding gap should the memo show?

87.A manager asks the committee to accept a risk budget increase because the fund has already lost money. Which response best ties the request to evidence?

88.A committee member suggests changing the benchmark after a drawdown to one that fell further. What should the manager propose?

89.A fund's drawdown review compares current positions with yesterday's plan, but all numbers are from different timestamps. What should the first page state?

90.A committee approves a hedge with a two-week review. Which follow-up plan is most actionable?

91.A manager proposes retaining a bond but trimming its position from 5% to 2% of NAV. If the bond falls 30% in the specified scenario, what is the modeled improvement from the trim alone?

92.A committee asks for the plan if liquidity worsens before planned trades can fill. What should the manager provide?

93.A fund's approved deleveraging plan calls for gross exposure below 105% by Friday. After fills, gross is 107% and the remaining order could lower it to 104%. What should the update say?

94.A committee proposes selling every holding that lost more than 10%. What evidence should the manager bring before adopting that rule for this episode?

95.A senior member wants one number that shows whether the drawdown response succeeded. What should the manager prioritize?

96.A manager needs to explain why an early trim would have helped in hindsight. What should a fair review compare?

97.A fund breaches a risk threshold during a reporting delay. What evidence belongs in the incident review?

98.A committee wants a one-line explanation of a loss caused mainly by both a sector overweight and weak names within that sector. Which statement is clearest?

99.The drawdown was amplified because the hedge failed during a venue disruption. A manager proposes improving forecast accuracy as the only response. What else should the committee assess?

100.A proposed plan reduces the current factor exposure by half but leaves more risk in one issuer. What should the committee decide explicitly?

101.A committee asks for a re-entry rule following a liquidity-driven exit. Which proposal can be monitored?

102.A committee paper proposes a $4 million sale and shows a $5 million alternative with similar modeled stress benefits. The larger sale has materially higher expected impact. What should the manager show?

103.A committee asks whether management's 8% drawdown estimate includes all fees and slippage. What answer is useful if the figure is gross of fees but includes trade prices?

104.A fund was 15% below peak at the trough and now stands 6% below peak. What should the committee update say about recovery?

105.A committee requests an update after an exception expires. The position is smaller but remains above the normal cap. What should the manager report?

106.A committee needs to know which remedy was authorized after a disputed drawdown review. What should the decision record capture?

107.A drawdown review identifies a model error that understated exposure and a correct investment thesis that nevertheless lost money. What follow-up should the committee distinguish?

108.A manager asks the committee to approve a plan after an 11% drawdown. A crowded factor caused most of the loss. The plan cuts that exposure, leaves stressed loss at 3% against a 4% cap, and will be reviewed Friday. Which closing request is strongest?