MM Drawdown Sizing
For a MM platform, say the drawdown limits are 5% (cut risk in half) and 10% (gone), and you have some fixed SR you think you can run at (say 1). What's the most common (not necessarily optimal) way to size? Something like: a 2-annual vol drawdown will hit the 5% limit, or a 3-annual vol drawdown will hit the 5% limit, or are these too restrictive vs. what is common? Seems to be a function of both strategy and risk tolerance. In theory, if you just set a higher drawdown threshold to hit the 5% drawdown limit, yes, in the short term you get paid less, but don't they just give you more capital anyways when you start showing positive SR? Is there any other factor I'm missing (do they bug you to deploy more risk if you size to 3-annual vol drawdown?)
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