Max Drawdown.
A definition, in plain English — with the books that teach it.
What it means
Max Drawdown is the largest peak-to-trough decline in a portfolio's value over a specified period, expressed as a percentage. It represents the worst-case loss a buy-and-hold investor would have experienced during that window. Institutional investors and hedge fund allocators use max drawdown as a risk floor — strategies with max drawdowns beyond a certain threshold are often disqualified regardless of average return. Recovery time from the max drawdown is an equally important companion metric.
Example
A quantitative fund started 2022 with a $10 million NAV, peaked at $12 million in March, then fell to $7.2 million by October before recovering. Max Drawdown = ($12M − $7.2M) / $12M = 40%. The fund needed a subsequent 67% gain to reach a new high-water mark.