Recovering from drawdowns in MM/pods
I wanted to get some thoughts on how experienced PMs recover from drawdowns in MM/pods in recent years? There's not enough discussion about this topic on WSO and wanted to start a thread where maybe people can share their experiences? Obviously newbies who haven't worked at a pod may not (yet) have this experience, but I intend this thread is for somewhat experienced PMs/senior analysts roles (including myself) to share how to recover from drawdowns.
I think being a PM at any pod structure, most people will (sooner or later) have rough patches where they drawdown say 3-5% of their book, even the most risk controlled strategies can be hit by exogenous black swans (earnings hiccups, inflation, trade war shocks, violent sector rotations, or tech disruption like Deep-seek a few weeks ago), where your book just goes crazy for a few days and trades just don't work (driven by market unwinds).
I'm curious how experienced PMs usually come back from 3-5% drawdowns under heighted pressure (from being fired, or constant surveillance by risk teams). My experience is once this happens at a firm, the psychology of the trader becomes somewhat impaired because you're always more concerned with damage control (preventing further losses) rather than being aggressive and going after more gains. Every new trade you put on has to work immediately or otherwise you will prematurely cut it again (in fear or even more short term losses) - this is just a negative spiral (putting on trades typically comes with small trading losses just from the transaction itself). I'm wondering how experienced PMs deal with this and get out of these losses and can come back. I know people who can come back on drawdowns but how do they manage it? The most difficult part for me is overcoming poor psychology (mental anguish) from the losses - seems very difficult to come back.
To make matters worse, recent market volatility seems to be increasing, with many stocks in TMT/industrial or consumer sectors seeing 5-10% random intra-day swings, driven not by fundamentals but by positioning, flow, social media (Twitter, CNBC, Reddit) mentions. 5-10% daily volatility not-related to fundamentals seems like the new normal. Under this volatile environment, how do PMs who manage hundreds of millions or billions even control the volatility of the entire book? Even pair trades go up or down by 3-5% daily in a lot of cases for those sectors.
Again, just from my own experience as a younger PM at a pod type shops - it seems most people's stint at a firm is determined by your initial few months of deployment. Luck/timing matters, given the extremely short term nature of these shops. If your first few trades just happens to work (due to luck, market timing, sector rotation that benefits you, etc...), it's much easier to convince a platform to give you time to crawl back from drawdowns down the line than if you start off on a rough footing. But people don't have control over this at all - starting times come down to luck.
Case in point, if you started your book in Oct 2024, right before the Trump election victory, November would have been a great month for almost any PM that just goes long momentum/growth. Not much actual work needed. But if you start in December of 2024, after the market rally has already occurred, all you're left with is market chop and volatility in Dec 2024, Jan 2025. A PM of similar "skill level" might have drastically different PnL results depending on a just a few months time.
Same with PMs who started in January of 2024 who got in on the massive AI rally. Same PM who started in July 2024 might immediately drawdown cause the market went to shit in Aug/Sept due to the huge JPY/semi's/tech unwind.
Over longer periods of time (1-2 years), this volatility tends to even itself out, but seems that many pods are cutting PMs after 1-3 months after a 2-5% drawdown (even on smaller amounts of capital) now. Turnover is insane. You basically have to get the first few trades right at any new pod shop or otherwise your job is in jeopardy. Pod shops have become a guessing game where PMs have to consistently position for market moves tomorrow, not even a week from now. Pod shops literally require positive PnL every single day - something that day traders, not "investors", focus on.
Just seems at a pod shop, once you're down 3-5% it becomes very difficult psychologically to deal with it but some PMs can and do come back consistently so how it is done? Or do you just expect to get fired and start somewhere else?
Based on the most helpful WSO content, recovering from drawdowns in MM/pod structures is a critical skill for PMs, especially given the high-pressure environment and tight risk limits. Here are some insights and strategies that experienced PMs use to navigate and recover from such situations:
Risk Management Discipline:
Psychological Resilience:
Reassessing and Adapting Strategy:
Communication with Risk Teams:
Leveraging Experience and Networks:
Starting Strong:
Accepting the Reality of Turnover:
Market Awareness and Flexibility:
Ultimately, recovering from drawdowns requires a combination of strong risk management, psychological resilience, and adaptability. While the high turnover at pod shops can make it challenging, those who can navigate these pressures and learn from their experiences often emerge stronger. If you're struggling with this, consider reaching out to mentors or peers who have successfully navigated similar challenges for additional guidance.
Sources: Is the Multi Manager HF Experience Worth It?, Performance of the best PM’s at MM’s?, Leaving a single manager to start a book at a platform, Random Musing on Mr. Market, It's getting ugly out there - Baly to cut 13 stock teams
You have to realize there are two options: 1. You succumb to your fears of getting fired due to additional drawdowns, which causes you to bet irrationally or overly conservatively, which only has one outcome which is getting cut, or 2. You stop worrying about getting fired and just bet normally as if the drawdown had never happened.
The PNL should not dictate how you bet. It offen does, especially in people without sufficient PNL management experiences, or people/managers who are less familiar with certain strategies.
Bottom line, if you’re too worried about getting fired, then it’s usually a self-fulfilling prophecy. Just do your thing, follow your normal investment process, and if it doesn’t work out then it doesn’t work out, and learn from your experiences. Sometimes the process didn’t work out to poor judgment or other times it doesn’t work out due to bad luck, or poor market conditions.
Bad advice.. if you do this you are guaranteed to hit your drawdown.. max drawdown is linearly increasing to the log(days traded) in normal returns and worse in fat tailed/ clustered returns.. so you have to manage your drawdown
Disagree. If you try to change your whole investment process after a drawdown you will absolutely get fired. Risk can see how you trade and if they sense you’re panicking and just acting irrationally then they’ll definitely pull the plug on you. You manage draw downs by potentially adjusting your position sizing and possible edge tables. This too can backfire as not being positioned aggressively enough during the post drawdown rebound can prolong your drawdown period.
Great post and def something everyone who manages money has to go through at some point. And I agree that these weird unwinds are getting more and more common, whether driven by quants, pods, or whomever.
For me it's all about being focused on the near-term catalyst path into the next print. I used to be focused more a couple quarters out, but that just doesn't seem to work anymore. It's all about the next intra quarter catalyst (data, conference presentation, etc) and knowing positioning/expectations into every event.
Outside of that, running things tight (close to 90 idio) until I get into earnings, where at some point I'll have to actually take a real bet.
Can you please elaborate on the near-term catalyst path focus? Are you using that as an opportunity to recover?
wouldnt you just manage the book tighter to not be exposed to factor/unwind/crowding, and just make calls into earnings if that is case?
I find reading charts help. good charts trend up, bad charts trend down. buy above 200d, short below.
we get it, you trade charts
you dont have to post about it in every single thread
everyone trades charts mr snowflake
Absolute first thing to do when you feel nothing is working and you are consumed by fear is to reduce gross exposure.
Helps a lot in reducing vol, calming things down, and move towards regaining your confidence and making better decisions.
This is the only right answer. Stick to your process but scale down GMV to reduce vol and increase runway to survive.
I think cutting capital when drawing down is pretty uncontroversial good practice.
I have heard some senior folks say you should also cut capital when drawing "up", especially in volatile conditions. I've heard mixed feedback on this idea, curious on your take.
(This is all under tight risk MM L/S equity framework)
bump
Cut your size, build momentum and look for asymmetric RR. Stick to your process and wait for time. Workout and lock in mentally so you don't get shaken up. I.e cut out distractions and such.
Also helps me to read books like market wizards where the greats talked about their "trials & tribulations" also articles, interviews etc
Dan Loeb, PTJ, Druck, Dalio he took a beating for a while, Soros, etc. It'll help keep you in a positive mindset cause they've faced similar DD situations and overcome it.
Soros: Anatomy Of A Comeback https://www.bloomberg.com/news/articles/1995-09-24/soros-anatomy-of-a-c…
That's Soros and Druck in '95, a rough year for them but they pulled through!!
Hope this helps. Godspeed brother. Stay excited for what's to come 🦅🦅
"Dan Loeb, PTJ, Druck, Dalio he took a beating for a while, Soros, etc. It'll help keep you in a positive mindset cause they've faced similar DD situations and overcome it."
Valid point here but I would like to emphasize that none of these investing "legends" (Dan Loeb, PTJ, Druck, Dalio, Soros) were immediately terminated on a 5%+ drawdown. I think you might be underestimating how tight the risk limits are at pods. These investing legends were not working for the pods we have today.
Facts. Just trying to keep a positive note yk
Reduce GMV and scale back slowly on high conviction names. Need to be laser focused on what's actually driving PNL and if there's too much vol in your book, then address it (reduce size, limit correlations, etc.).
MM PNL Management:
Some PMs stick to their process and forces their type of bet regardless of market regimes. When it works, great. When it doesn't... they say market is irrational and moves can't be explained or analyzed because the market didn't adapt to their strategy.
Some PMs are really clever at adapting their process and size their books / views depending on their read on the market. I’ve found what separates survivors is how quickly they recognize regime change, ability to adjust gross/net quickly (some have more flex than others), focus on book construction vs individual positions, and managing psychology through the recovery.
Context:
When we entered 2025 and saw Jan driving high Sharpe moves up, many L/S books made money on Trump ST momo winners. I saw many pat themselves on the back implying skill, ignoring incremental investor anxiety and increased short-term vol when the bar for EPS during Q4 prints was really, really high to grow in to the move in P. This causes vol above many vol budgets… And suddenly we have people blaming "random intraday swings" & irrational market behaviour for the obvious reversal for the same reasons their books moved in the first place. I have zero sympathy for that type of PNL management...
Whilst I agree with OP that initial performance impacts runway, I'd say good platform operators / risk teams are smart enough to see risk management discipline, process repeatability and adaptation to market feedback. Seen countless people draw-down only to get backing because they understood the root causes of the portfolio moves, PM's highlighting ST and MT reversal risk in the book & why they’ve done what they’ve done.
On the flipside, I’ve found that risk & the people upstairs get nervous when PMs start blaming the market or don’t clearly articulate why their portfolio has moved the way it has in a compelling manner. You'll see people blaming the market when the PNL turns red, even if they're equally clueless when the same factors drove the PNL in to the green. The last thing one should blame is stochastic processes in the market and/or irrational market behaviour. You didn’t when you made money that way, so you have no business blaming the market when it goes against you. When you blame the market or randomness, that's when platform folks get nervous around you with their capital.
Process for draw down management:
Unpopular opinion:... How you flex the risk model sits at the centre of the process. Not ideation... risk management is not a just a loss mitigation technique, it’s the backbone to an alpha-generation process under a MM framework. The MM risk framework is about deploying volatility. How much spread you have in the volatility rails depends on when your strategy is rewarded. Why does this matter? Not all market regimes are equal. You'll have asymmetric gearing to how your names are performing relative their peers and the market. So a stale process for risk managing your coverage is bound to fail. We need game plans for discriminating when we deploy vol.
Instead of doing so, we sometimes overtrade during recovery (common mistake) and abandoning game plans. Sizing and # of names in the portfolio should be constructed in a way that VaR is tight enough for you to have time to stop the bleeding when (not if) your strategy breaks down (which it will). This is when your vol deployment strategy matters. Don’t lose conviction in the strategy, but aware when strategy edge works and not!
Focus on making good decisions, not recovering losses. If you check what works and why and what doesn’t and why regularly you’ll see patterns of when PNL is at risk and not. If you’re making money in ways you don’t manage to link to your process, start covering even if it's moving in to the green. Sustainable PNL will follow a sound process. With that said, I’m fully aware this is easier said than done when it actually happens.
The way I think about it is:
The Bottom Line:
Adjust book bias based when edge works - sometimes that means running dramatically different book construction in defensive names and capital, and playing & deploying vol when you see correlation that links to your strategy. If you make money of one time regime wonders (Trump, AI), that’s not going to work for you over the long-term and you will get caught with your pants down at some point.
For better or for worse, investing under a MM model means you need to overemphasize risk managing a bunch of tickers rather than expressing differentiated views and backing yourself over J curves hoping the market agrees with you at some point. That’s why we get paid 1/5th of returns of someone else’s money whilst they foot the bill for us to have the privilege of doing so. You don't complain about the model when you get paid, don't complain when the model suddenly goes against you.
Don’t always hunt for alpha when you can’t read the market. Why? An extreme example: ticker A down 20% need 25% to get break-even to zero. Which in reality requires significantly higher IRR as you need that return in a shorter time frame to break even on smaller GMV. Avoiding losses is a greater skill then capturing alpha imo. Cap preservation is the name of the game. I'm the first to admit MM isn’t the “purest” form of investing, but those are the rules we signed up for when we took this job. It means we’ll have 0-2% years occasionally, but we’re still in the game for those 4-5% years.
Okay that’s great in theory… but in theory communism works. What can we actually do in practise when shit hits the fan?
Prepare to fail. Have pre-defined plans for different drawdown scenarios to stop the bleeding.
When you're drawing down you're offering the platform a product which isn't delivering as promised. You're the product owner. You need product development to fix it. That comes from process refinement, not one-off ideation during times when your strategy / views works.
/2c
(4) is excellent. Thanks for these
Dope
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