Capital Destruction: Drawdowns vs Downside Deviations

If you had to choose between experiencing drawdowns and experiencing downside deviations, which would you prefer?   Anyone working in product development in asset management will tell you downside deviations are 10x as bad as drawdowns.

Bridgewater Reveals Uncorrelated Strategy, Volatility & Beta Targeting

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Let’s define each so we’re on the same page.  Drawdowns are declines from peak value – invest $100, it grows to $120 and then your investment value declines to $60. That’s a 50% drawdown (120-60)/120 = 50%

Downside deviations on the other hand are negative deviations from a benchmark. For example, if the market benchmark is down 3% in one year and your fund is down 10%, the downside deviation is -7%.  Similarly, if...