A Model for Drawdown Insurance
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.