Are drawdown limits based on whenever the portfolio first hits a certain valuation?
Take MLP for example,
let's say I have a 100 million dollar book and a 5% drawdown limit before I get fired. I decide to yolo my entire book in a single stock.
Say the stock experience extreme volatility. Over the course of several days, it also gyrates intraday 10% from the original price (draws my portfolio down to 6%) and it returns to the original price at EoD.
Now am I fired the first time it moves 10% (ASAP, no arguments) or do I have some leeway (over several days, etc)?
If you yolo your book, Izzy will call you right away himself.
Removed
To answer the more specific question you’re asking, it’s not typically intraday. It could be measured daily, monthly or sometimes longer.
but if your portfolio drew down 11% by 10am and ended the day flat, at most peace’s you’d be ok. But someone would definitely ask what was going on at 10am and they might be getting ready to axe you.
How about we start by not “yolo-ing” majority of these places PMs self manage themselves so when it happens they can quickly explain what occurred and their thinking. When the market sees risk outside your control thats why you want to use these chips to get more rope.
Let's not forget that a single stock portfolio wouldn't fly at any pod shop. You'd be way offsides on pretty much every factor pretty quickly and getting a call from the risk team.
Adding to the wealth of accurate info here, I'll also add MM PMs generally run somewhere between 60% to 80% deployed, so a 10% drawdown on deployed capital is only 6% - 8% on allocated capital, so you don't hit the risk limit.
Curious on this point - is there a typical limit to not fully deploying capital? For example, if a PM stay at ~50% deployed for a year does he get his allocation cut at year end (despite say decent PnL)?
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