Understanding the term 'Draw Down' in Private Equity

The Draw Down is a financial tool used by investors to calculate the maximum loss their portfolio can sustain before it becomes profitable again. A Draw Down describes the difference between the highs and lows of a series of financial assets.

The Draw Down chart is a graph showing the financial performance of a portfolio, with data stopped at a given point in time. It is a very useful tool for measuring risk exposure over a given period of time.

A Draw Down represents the difference between the highest point of return and the lowest point of return over a given period of time. This means it measures the maximum loss incurred by the portfolio between the two points. The lower the Draw Down, the less risk the portfolio is exposed to, and the more stable the performance is likely to be.

A Draw Down can be seen as an indicator of the quality of an investment. It helps investors determine whether their portfolio is sufficiently diversified and sufficiently protected against market fluctuations. It's important to monitor your portfolio's Draw Down regularly, so you can react quickly if any changes need to be made.