Glossary

Maximum Drawdown

Also known as: Peak-to-Trough Decline

The largest peak-to-trough decline in a portfolio's or index's cumulative value over a specified period, expressed as a percentage, measuring the worst realized loss an investor would have experienced from the highest prior value before recovery began.

Maximum drawdown differs from standard deviation and VaR in that it is a realized, path-dependent historical measure rather than a probabilistic estimate, and it captures the duration of a loss — the time spent 'underwater' before the portfolio recovers to its prior peak — in addition to the loss's magnitude, a dimension that matters directly to limited partners managing capital call and liquidity needs across a program of multiple fund commitments. Because standard institutional real estate benchmarks are built from appraisal-based, smoothed valuations, their historical maximum drawdown during past downturns is understated relative to the drawdown institutional investors actually experienced through transaction pricing or through unsmoothed return series during the same period, a distinction that matters when using benchmark maximum drawdown as a proxy for a portfolio's true worst-case historical experience.