Explain how maximum drawdown, drawdown duration, capture ratios on the upside and downside, and up/down capture help in assessing managers
The idea
These measures describe how a manager behaves in different market conditions, which matters for fit with the client. A manager with 80% upside capture and 60% downside capture has an up/down capture ratio of 1.33, a pattern suited to a loss-averse investor willing to trade some upside for protection. A ratio above 1 indicates a convex, positively asymmetric return pattern. Maximum drawdown shows the worst loss an investor would have endured, and drawdown duration how long recovery took; both matter for clients with spending needs, short horizons or a tendency to abandon a strategy after losses. They are path dependent and specific to the sample, so they complement rather than replace risk-adjusted measures.
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