A Model for Drawdown Insurance

Tim Leung, Ph.D.
3 min readAug 28, 2023

Many individual and institutional investors are wary of large market drawdowns as they not only lead to portfolio losses and liquidity shocks but also indicate potential imminent recessions.

As is well known, fund managers are typically compensated based on the fund’s outperformance over the last record maximum, or the high-water mark. As such, drawdown events can directly affect the manager’s income.

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Tim Leung, Ph.D.

Boeing Endowed Chair Professor of Applied Math, Director of the Computational Finance & Risk Management (CFRM) Program at University of Washington in Seattle