Question to PMs at MMs: how do drawdown limit resets work, from a timing and %/$ perspective?
1. For instance, +10% in H1, down 5% from there within the next 2 months.
2. Is the reset always on 1 Jan? Meaning down 5% in Jan and out/capital cut in half.
3. Are drawdown limits based on GMV?
| +23 | % of pods making 9 figures consistently? | 29 | 1d |
| +13 | Fastest Way to MMHF? | 6 | 14h |
| +6 | Bad PM | 3 | 12h |
| +6 | Average single manager slope | 4 | 8h |
| +4 | Amakor Capital - Who are these guys? | 2 | 4d |
| +2 | Walleye SA 2027 | 4 | 12h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
You've posted a suspicious amount of threads on draw downs and switching firms
You getting fired soon?
Suspicious dumb answer without any value add. Not every PM here works at a platform, but other HFs.
Monkey shit. Guess I touched a nerve.
Haha, not being laid offer but comparing offers. When will you make PM or lazy career ANL?
Drawdowns are adjusted after a good year. That’s a useful topic lots of investors don’t think about properly before moving to a pod.
At most shops, drawdowns are measured off your high-water mark. Resets are not really a thing, as far as I know, Jan 1st means nothing.
That's why you hear stories about someone getting fired "even though hr made money that year". Well, yes, but he was up 12% in Feb and had come down to +3% in 2H.. it's the rules of the game.
I was told some very senior PMs have their drawdowns adjusted after some time. Don’t know specifics. And what muppet is throwing around the MS, stupid college kids.
every shop is different. However let me run you thru the mind of your manager to help you think about the problem. Let's assume your contract is very simple: whatever your pod makes from Jan 1 to Dec 31, you get paid 20%.
Scenario 1: If you make $100M and lose $100M in the same year you made $0 and are entitled to $0 bonus.
Scenario 2: On the other hand, if you made $100M in year 1 and lost $100M in year 2, you are entitled to $20M bonus from your performance in year 1. Therefore you were paid $20M in bonuses more than you were entitled to.
In fact scenario 2 is worse than it sounds. You now have a $100M "PNL debt" you owe to the fund before you can be paid more bonuses. At this point, the PM has two choices to get rid of his negative equity: swing for the fences and hope to earn back the debt, or just quit and find a new job where he starts from $0. Both options leave the original firm in a worse state. This is why every MMHF has drawdown limits which stop a trader from digging him into this exact hole.
Just feels shitty that if you make $100m in 1H and lose $50m in 2H to net be up $50m on the year to get canned. I can understand resetting maybe starting Jan 1st, to prevent you from losing more but shitty to get canned and not paid for the net profits you made that year.
I don't think understand. The drawdown resets happen when you get paid. if you get paid out on $100M of PnL, your drawdown limit resets. If you don't get paid anything, you continue trading and nothing resets. If the firm wants to unwind your pod when you're up on the year, your contract probably states they still have to pay you out on any unpaid net PnL you've generated.
In your example, I make $100M then lose $50M. If I was paid on the $100M then my balance is now -$50M and I owe $50M to the firm before I can be paid more bonuses. On the other hand, if I was never paid on the $100M, I still have a balance of $50M to work with. I can hibernate for 6 months and still get paid on the $50M. The firm's still allowed to axe you whenever/however they want. They can restrict your VaR. What they can't do is not pay you on the $50M.
edit: Someone who dropped $50M after making $100M would most likely get a call from their manager/risk dept since he still lost lots of money rather fast. I think it's unlikely he would be fired. However, depending on how the conversation goes, there's a good chance he'll face much tighter risk constraints going forward or be forced to liquidate the riskiest products in his book at a loss. In a lot of these situations the PM is not so much "fired" as he starts chafing at the leash and quits for a competitor.
How drawdown limits work is well defined in a contract that as a PM you knowingly sign onto and supposedly understand.
If you "feel shitty" about it, as they say, no one cares about your feelings. Too many millennials whining about their feelings and ignoring responsibility.
1. Often, but not always, based on high water mark. So theoretically it is possible to be stopped out with positive PnL on the year. If you make a lot and then lose most of it.
2. Yes, with the exception that most funds will allow you to use your deferred against your drawdown. So, in the case that you made money last year, your new stop is 5% plus whatever deferred you have in the fund.
3. Usually some kind of moving average high-water mark on your capital allocation/PnL.
We have yearly considerations, so a classic MM would kick a PM out if he was up 15% in Jan and down 5% in Feb? Does the calendar year play any role at all or the drawdown is on a rolling basis? Thanks
There's no classic MM, each does it a bit differently. Bluecrest has a hard 5% drawdown limit, but it's from 0 not your high-water mark, so (theoretically) you will not get stopped out going from +$10mm to + $0. I say theoretically because there's a lot of discretion risk management has when determining the "unwind cost" of a position in stressed conditions, so they can fuck you even before you hit the official limit. They also add your deferred to your drawdown limit so if you made money in the past two years, you can lose up to your drawdown + deferred before you hit the official limit.
Other places might base it off a 2-week rolling high water mark. So, if your drawdown is 5%, you have $100mm capital, and you make $10mm in Jan and you lose $6mm in the first two weeks of Feb, you'll hit the limit. However, if you're up $10mm in Jan and then bleed $1mm per month for the rest of the year, you shouldn't hit the limit.
Calendar year your PnL resets and bonus is paid out with some left as deferred. Most places will invest your deferred in the fund and add it to your drawdown limit for the next year, so if your capital base is $100mm, you made $10mm last year on a 20% payout and 50% is deferred, you got paid $1mm in cash and $1mm in deferred. Next year, assuming capital base is unchanged and a 5% drawdown limit, your limit is $90mm before you burn through all your deferred.
Most MM management teams are sensible people that will interpret the specific situation. Most times I don't think they will fire someone in that case +15% then -5% you describe.
At the same time, said PM needs to be seriously careful after that drawdown, as all eyes are on him now. Needless to say, anyone that is up 15% in a month in a MM construct either got incredibly lucky or is running risks they shouldn't.
It's also a sad reality that if MMs start making exceptions with drawdowns all the time, the limits lose their teeth and PMs start going too loose with risk.
Placeat labore qui omnis. Soluta dolorem doloribus cum. Omnis quia et debitis impedit. Sed culpa ut cumque possimus corporis vero autem. Dolorum rerum quos pariatur amet. Et consequatur nostrum omnis veritatis sapiente magni ut.
Quae qui ullam voluptatibus aperiam cupiditate. Ut sint corporis nulla. Reprehenderit nihil distinctio incidunt aut deserunt harum laudantium. Modi saepe ipsa unde cupiditate voluptas velit.
Quae est odio est qui. Occaecati voluptatibus voluptas aspernatur rerum et. Fugiat eum et dicta voluptas expedita. Odit est porro natus facere voluptas voluptatibus nostrum sequi.
Qui eligendi ratione placeat. Hic voluptas omnis debitis. Molestiae tenetur adipisci dolor iste fugiat facere. Aliquid impedit aut dolore et adipisci delectus et. Voluptatem quia est eum mollitia et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...