HOW LONG DOES IT TAKE TO RECOVER

FROM A DRAWDOWN?
Marcos Lpez de Prado
Lawrence Berkeley National Laboratory
Computational Research Division

Electronic copy available at: http://ssrn.com/abstract=2254668

Key Points
Investment management firms routinely hire and fire
employees based on the performance of their portfolios.
Such performance is evaluated through popular metrics that
assume IID Normal returns, like Sharpe ratio, Sortino ratio,
Treynor ratio, Information ratio, etc.
Investment returns are far from IID Normal.
If we accept first-order serial correlation:
Maximum Drawdown is generally greater than in IID Normal case.
Time Under Water is generally longer than in IID Normal case.
However, Penance is typically shorter than 3x (IID Normal case).

Conclusion: Firms evaluating performance through Sharpe

ratio are firing larger numbers of skillful managers than
originally targeted, at a substantial cost to investors.
2

Electronic copy available at: http://ssrn.com/abstract=2254668

SECTION I
The Need for Performance Evaluation

Electronic copy available at: http://ssrn.com/abstract=2254668

Why Performance Evaluation?

Hedge funds operate as banks lending money to
Portfolio Managers (PMs):
This bank charges ~80% 90% on the PMs return (not
the capital allocated).
Thus, it requires each PM to outperform the risk free rate
with a sufficient confidence level: Sharpe ratio.
This bank pulls out the line of credit to underperforming
PMs.
Allocation
1

Investors
funds

Allocation
N
4

How much is Performance Evaluation worth?

A successful hedge fund serves its investors by:
building and retaining a diversified portfolio of truly skillful
PMs, taking co-dependencies into account, allocating
capital efficiently.
weeding out unskilled PMs to protect the invested
principal.

Investors pay high fees for those services, typically:

2% management fee.
20% performance fee.

An accurate performance evaluation methodology

is worth a lot of money!!
5

How are PMs Stopped-Out?

Drawdowns can be the result of
Poor investment skills: The PM should be weeded out.
Bad luck: The PM should be kept on platform.

Stopping-Out a PM is a decision under uncertainty.

An accurate performance
evaluation methodology is able
to discriminate between both:
maximizing the probability of true
negatives (retaining good PMs).
subject to a user-defined
probability of false positives (bad
luck stop-outs).
6

SECTION II
Stop-Outs under the IID Normal Assumption

The IID Normal Framework (1/2)

Suppose an investment strategy which yields a sequence
of cash inflows as a result of a sequence of bets
1, , , where
= +
such that the random shocks are IID distributed ~ 0,1 .
Let us define a function that accumulates the
outcomes over t bets.

=1

where 0,1, , and 0 = 0.

8

The IID Normal Framework (2/2)

Because is the aggregation of t IID random variables
~ , 2 , we know that ~ , 2 .
1

For a significance level < , we define the quantile

2
function for

, : = +
where is the critical value of the Standard Normal
distribution associated with a probability of performing
worse than , , i.e. : = , . Then, quantile
loss is defined as
, : = max 0, ,
9

Maximum Drawdown
PROPOSITION 1: Assuming IID outcomes ~ , 2 ,
and > 0, the maximum quantile-loss associated with a
1
significance level < is
2

=
4

which occurs at the time (or bet)

=
2

10

Time under Water

PROPOSITION 2: Assuming IID outcomes ~ , 2 ,
and > 0, the time under water associated with a
1
significance level < is
2

PROPOSITION 3: Given a realized performance < 0

and assuming > 0, the implied time under water is
2

= 2 2 +

It does not only matter how much money a PM has lost,

but critically, for how long.
11

The Triple Penance Rule (1/2)

THEOREM 1: Under IID Normal outcomes, a strategys
maximum quantile-loss for a significance level
occurs after observations. Then, the strategy is
expected to remain under water for an additional 3
after the maximum quantile-loss has occurred, with a
confidence 1 .
If we define : =

1, then the triple

penance rule tells us that, assuming independent

identically distributed as Normal (which is the standard
portfolio theory assumption), = , regardless
of the Sharpe ratio of the strategy.
12

The Triple Penance Rule (2/2)

5000000

4000000

3000000

It takes three time longer to recover from the maximum

quantile-loss ( ) than the time it took to produce it ( ),
1
for a given significance level < , regardless of the PMs
2
Sharpe ratio.

Quantile (in US$)

2000000

1000000

0
-0.1

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

-1000000

-2000000

-3000000

-4000000

-5000000

3
Time Under the Water

13

Example 1
PM1 has an annual mean
and standard deviation of
US$10m (SR=1), and PM2
has an annual mean of
US$15m and an annual
standard deviation of
US$10m (SR=1.5).

20000000

0.05 [PM1]
15000000

0.05 [PM2]

5000000

-5000000

-10000000

0.5

0.05 [1]

0.05 [2]

Quantile (in US$)

10000000

1.5

Time Under the Water

PM1

PM2

2.5

For a 95% confidence level,

PM1 reaches a maximum
drawdown at US$6,763,859
after 0.676 years, and
remains up to 2.706 years
under water.
PM2 reaches a maximum
drawdown at US$4,509,239
after 0.3 years, and remains
1.202 years under water.
14

Example 2
2000000

1000000

0.08 1 = 0.02 2
0
0

0.5

1.5

-1000000
Quantile (in US$)

0.08 [1]
-2000000

-4000000

-5000000

-6000000

-8000000

2.5

For a ~92% confidence level,

PM1 reaches a maximum
drawdown at US$5,000,000
after 0.5 years, and remains
up to 2 years under water.

-3000000

-7000000

PM1 has an annual mean

and standard deviation of
US$10m (SR=1), and PM2
has an annual mean of
US$15m and an annual
standard deviation of
US$10m (SR=1.5).

0.02 [2]

3
Time Under the Water
PM1

PM2

For a ~98% confidence level,

PM2 reaches a maximum
drawdown at US$7,500,000
after 0.5 years, and remains
up to 2 years under water.
15

Implications of the Triple Penance Rule

1. It makes possible the translation of drawdowns in terms
of time under water [Cf. Proposition 3].
2. It sets expectations regarding how long it may take to
earn performance fee (for a certain confidence level).

The remaining time under water may be so long that

withdrawals are expected. This has implications for the firms
cash management.

3. It shows that the penance period is independent of the

Sharpe ratio (in the IID Normal case).

E.g., if a PM makes a fresh new bottom after being one year

under water, it may take him 3 years to recover, under the
confidence level associated with that loss. This holds true
whether that PM has a Sharpe of 1 or a Sharpe of 10.
16

SECTION III
The IID Normal Assumption

The IID Normal Assumption (1/2)

In general, traditional performance statistics assume
that returns are IID Normal:
0.014

Returns are Independent.

0.012

However, a test of runs shows that

negative returns occur in sequences.

0.01

Returns are Identically Distributed.

0.008

0.006

However, squared returns exhibit

positive autocorrelation (-clustering).

The distribution is Gaussian (or

Normal).

0.004

0.002

0
-0.1

-0.08

-0.06

-0.04

pdf1

-0.02

pdf2

pdf Mixture

0.02

0.04

0.06

0.08

pdf Normal

However, hedge fund returns exhibit

asymmetry and fat tails.

Unfortunately, the IID Normal assumption is not

supported by the data. Then, why is it used?
18

0.1

The IID Normal Assumption (2/2)

It is a Hail Mary pass, a convenient leap of faith that
simplifies the math involved ( at a substantial cost to
firms and investors!)
Experience with real-world data, however, soon convinces
one that both stationarity and Gaussianity are fairy tales
invented for the amusement of undergraduates.
David J. Thomson, Bell Labs (1994)

A popular myth is that Central Limit Theorems (CLTs)

justify the IID Normal assumption on a sufficiently large
sample. This is false:
CLTs require either independence or weak dependence.
Normality is not recovered over time in the presence of dependence.
19

SECTION IV
Stop-Outs under first-order auto-correlated outcomes

First-order auto-correlation
It is well established that hedge fund strategies
exhibit significant first-order auto-correlation. E.g.,
see Brooks and Kat [2002].
There are various reasons why strategies returns
exhibit first-order serial-correlation:
Unmonitored risk concentration (quite different from VaR).
Inconsistent profit taking and stop loss rules.
Serially correlated and cointegrated investments.

First-order auto-correlation introduces a serial

dependence that explains by itself why returns are:
Non-Identically distributed.
Non-Normal.
21

Non IID Normal Perform. Eval. Framework (1/3)

Suppose an investment strategy which yields a sequence
of cash inflows as a result of a sequence of bets
1, , , where
= 1 + 1 +
such that the random shocks are IID distributed ~ 0,1 .
These random shocks follow an independent and
identically distributed Gaussian process, however is
neither an independent nor an identically distributed
process. This is due to the parameter , which
incorporates a first-order serial-correlation effect of autoregressive form.
is stationary IIF 1,1 .
22

Non IID Normal Perform. Eval. Framework (2/3)

PROPOSITION 4: Under the stationarity condition
1,1 , the conditional distribution of a cumulative
function of a first-order auto-correlated random
variable follows a Normal distribution with
parameters:
+1
~
0
1
2
+ ,
1

2 +1 1
+1 1
2
++1
2
1
1

23

Non IID Normal Perform. Eval. Framework (3/3)

PROPOSITION 5: The distribution of is non-stationary
and unconditionally non-Normal.
,

+1
=
0 +
1
+

2 +1

+1

2
++1
2
1
1

PROPOSITION 6: For > 0, , is unimodal, a global

minimum exists ( ) and
= 0, can be computed.
24

SECTION V

The cost of assuming that returns are IID Normal

Drawdown Stats assuming IID Normal returns

Code
HFRIFOF Index
HFRIFWI Index
HFRIEHI Index
HFRIMI Index
HFRIFOFD Index
HFRIDSI Index
HFRIEMNI Index
HFRIFOFC Index
HFRIEDI Index
HFRIMTI Index
HFRIFIHY Index
HFRIFI Index
HFRIRVA Index
HFRIMAI Index
HFRICAI Index
HFRIEM Index
HFRIEMA Index
HFRISHSE Index
HFRIEMLA Index
HFRIFOFS Index
HFRIENHI Index
HFRIFWIG Index
HFRIFOFM Index
HFRIFWIC Index
HFRIFWIJ Index
HFRISTI Index

Mean
0.0055
0.0089
0.0099
0.0095
0.0052
0.0096
0.0052
0.0048
0.0095
0.0085
0.0072
0.0069
0.0080
0.0071
0.0071
0.0104
0.0080
-0.0017
0.0111
0.0068
0.0101
0.0094
0.0056
0.0089
0.0084
0.0111

Phi
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000

Sigma
0.0170
0.0202
0.0264
0.0215
0.0174
0.0188
0.0094
0.0116
0.0192
0.0216
0.0177
0.0129
0.0130
0.0104
0.0200
0.0410
0.0382
0.0535
0.0508
0.0248
0.0367
0.0360
0.0159
0.0390
0.0363
0.0464

MaxQL
3.53%
3.10%
4.80%
3.28%
3.96%
2.48%
1.16%
1.90%
2.63%
3.69%
2.95%
1.64%
1.42%
1.03%
3.79%
10.98%
12.38%
-15.79%
6.09%
9.02%
9.33%
3.05%
11.50%
10.58%
13.17%

t*
6.3996
3.4905
4.8667
3.4435
7.6477
2.5827
2.2389
3.9492
2.7554
4.3218
4.1164
2.3883
1.7701
1.4444
5.3200
10.6100
15.4963
-14.2615
8.9046
8.9357
9.9416
5.4422
12.8580
12.5579
11.8933

MaxTuW
25.5985
13.9621
19.4669
13.7740
30.5909
10.3309
8.9554
15.7968
11.0216
17.2870
16.4656
9.5530
7.0803
5.7777
21.2800
42.4399
61.9851
-57.0458
35.6185
35.7430
39.7662
21.7686
51.4319
50.2317
47.5731

Penance
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
-3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000
3.0000

Drawdown stats for hedge

fund indices in the HFR
database, computed on
the a sample between
01/01/1990 and
01/01/2013, for = 0.05.
As stated in Theorem 1,
Penance = 3: Regardless of
the Sharpe ratio of the
hedge fund, it takes three
time longer to recover
from the bottom of the
drawdown.

The IID Normal assumption implies that = 0. An = 0.05 means

that hedge funds are willing to accept a 5% probability of firing skillful
PMs (false positives).
26

Drawdown Stats accepting serial dependence

Code
HFRIFOF Index
HFRIFWI Index
HFRIEHI Index
HFRIMI Index
HFRIFOFD Index
HFRIDSI Index
HFRIEMNI Index
HFRIFOFC Index
HFRIEDI Index
HFRIMTI Index
HFRIFIHY Index
HFRIFI Index
HFRIRVA Index
HFRIMAI Index
HFRICAI Index
HFRIEM Index
HFRIEMA Index
HFRISHSE Index
HFRIEMLA Index
HFRIFOFS Index
HFRIENHI Index
HFRIFWIG Index
HFRIFOFM Index
HFRIFWIC Index
HFRIFWIJ Index
HFRISTI Index

Mean
0.0055
0.0089
0.0099
0.0095
0.0052
0.0096
0.0052
0.0048
0.0095
0.0085
0.0072
0.0069
0.0080
0.0071
0.0071
0.0104
0.0080
-0.0017
0.0111
0.0068
0.0101
0.0094
0.0056
0.0089
0.0084
0.0111

StDev
0.0170
0.0202
0.0264
0.0215
0.0174
0.0188
0.0094
0.0116
0.0192
0.0216
0.0177
0.0129
0.0130
0.0104
0.0200
0.0410
0.0382
0.0535
0.0508
0.0248
0.0367
0.0360
0.0159
0.0390
0.0363
0.0464

Phi
0.3594
0.3048
0.2651
0.1844
0.3535
0.5458
0.1644
0.4557
0.3916
-0.0188
0.4838
0.5059
0.4528
0.2982
0.5780
0.3593
0.3112
0.0907
0.1969
0.3231
0.2011
0.2314
0.0422
0.0505
0.0954
0.1608

Sigma
0.0158
0.0192
0.0255
0.0211
0.0163
0.0158
0.0093
0.0103
0.0177
0.0216
0.0155
0.0111
0.0116
0.0100
0.0163
0.0383
0.0363
0.0533
0.0499
0.0235
0.0359
0.0350
0.0159
0.0390
0.0361
0.0458

t-Stat(Phi)
6.2461
5.1907
4.4601
3.0419
6.1295
10.5612
2.7035
8.3023
6.9021
-0.3051
8.9720
9.5874
8.2430
5.0670
11.4865
6.2431
5.3109
1.4776
3.2575
5.5360
3.3299
3.8573
0.6842
0.8200
1.5542
2.6428

MaxQL
6.65%
4.74%
7.27%
4.15%
7.52%
5.40%
1.33%
4.00%
4.34%
-6.69%
3.12%
2.00%
1.08%
11.60%
21.71%
22.57%
-22.77%
11.00%
12.84%
14.15%
3.25%
12.59%
12.55%
17.61%

t*
14.5551
7.3222
9.0236
5.4157
16.9638
10.7065
3.4722
11.9696
7.3855
-13.3986
8.9080
5.9134
3.2508
22.1308
23.4821
30.2969
-21.7061
18.2415
13.8963
16.4723
6.0074
14.3295
15.4084
16.8089

TuW
Penance
52.1831
2.5852
24.4918
2.3449
32.1120
2.5587
19.1093
2.5285
61.9700
2.6531
30.4208
1.8413
11.6921
2.3674
39.0229
2.2602
22.6758
2.0703
--43.7383
2.2644
25.0456
1.8116
15.3920
1.6029
8.9163
1.7428
74.4170
2.3626
87.9134
2.7439
116.2881 2.8383
--84.0775
2.8735
67.7961
2.7166
52.7651
2.7971
62.5481
2.7972
23.5097
2.9135
56.6921
2.9563
60.4123
2.9207
65.0637
2.8708

The t-Stat of is
inconsistent with
the IID Normal
assumption in 21
out of 26
strategies, with a
95% confidence
level.

Properly modeling the first-order serial auto-correlation gives:

is on average 65% greater than in the IID Normal case.
is on average 125% greater than in the IID Normal case.
is on average 89% greater than in the IID Normal case.
Penance is on average 17% lower than in the IID Normal case:
Penance is lower when is greater.
Penance is lower when the Sharpe ratio is greater.
27

The high cost of simplified Math (1/4)

These results lead to two interesting implications:
Hedge fund strategies are much riskier than implied by the IID
Normal assumption. This leads to an over-allocation of capital by
Markowitz-style approaches to hedge fund strategies.
PMs and strategies evaluated by those IID-based metrics are
being stopped-out much earlier than it would be appropriate. A
good PM running a strategy that delivers auto-correlated
outcomes may be unnecessarily stopped-out because the firm
assumed IID Normal returns.

Wrongly stopping-out a PM is a particularly bad decision,

because one positive aspect about strategies with autocorrelated returns is that their Penance is shorter than in
the IID Normal case. The firm is taking a 20% loss on the
drawdown every time it fires a skillful stopped-out PM.
28

The high cost of simplified Math (2/4)

We would like to understand whether hedge funds
intending to accept a probability 1 of firing a truly skillful
portfolio manager (a false positive) are effectively
taking a different probability 2 as a result of assuming
returns independence.
Combining Propositions 1 and 4 we can compute the 2
associated with = 1 =
2 =

4
2
1

1
4

as

1 +1

0 + 1
1
+1

1
1 +1 1

2
+

+1

1
1
2 1
29

The high cost of simplified Math (3/4)

Code
HFRIFOF Index
HFRIFWI Index
HFRIEHI Index
HFRIMI Index
HFRIFOFD Index
HFRIDSI Index
HFRIEMNI Index
HFRIFOFC Index
HFRIEDI Index
HFRIMTI Index
HFRIFIHY Index
HFRIFI Index
HFRIRVA Index
HFRIMAI Index
HFRICAI Index
HFRIEM Index
HFRIEMA Index
HFRISHSE Index
HFRIEMLA Index
HFRIFOFS Index
HFRIENHI Index
HFRIFWIG Index
HFRIFOFM Index
HFRIFWIC Index
HFRIFWIJ Index
HFRISTI Index

MaxQL
0.0353
0.0310
0.0480
0.0328
0.0396
0.0248
0.0116
0.0190
0.0263
0.0369
0.0295
0.0164
0.0142
0.0103
0.0379
0.1098
0.1238
-0.1579
0.0609
0.0902
0.0933
0.0305
0.1150
0.1058
0.1317

t*
6.3996
3.4905
4.8667
3.4435
7.6477
2.5827
2.2389
3.9492
2.7554
4.3218
4.1164
2.3883
1.7701
1.4444
5.3200
10.6100
15.4963
-14.2615
8.9046
8.9357
9.9416
5.4422
12.8580
12.5579
11.8933

Alpha1
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500
0.0500

Mean2
0.0055
0.0089
0.0099
0.0095
0.0052
0.0096
0.0052
0.0048
0.0095
0.0085
0.0072
0.0069
0.0080
0.0071
0.0071
0.0104
0.0080
-0.0017
0.0111
0.0068
0.0101
0.0094
0.0056
0.0089
0.0084
0.0111

Phi2
0.3594
0.3048
0.2651
0.1844
0.3535
0.5458
0.1644
0.4557
0.3916
-0.0188
0.4838
0.5059
0.4528
0.2982
0.5780
0.3593
0.3112
0.0907
0.1969
0.3231
0.2011
0.2314
0.0422
0.0505
0.0954
0.1608

Sigma2
0.0158
0.0192
0.0255
0.0211
0.0163
0.0158
0.0093
0.0103
0.0177
0.0216
0.0155
0.0111
0.0116
0.0100
0.0163
0.0383
0.0363
0.0533
0.0499
0.0235
0.0359
0.0350
0.0159
0.0390
0.0361
0.0458

Alpha2
0.1205
0.1014
0.0975
0.0796
0.1207
0.1312
0.0728
0.1331
0.1114
-0.1400
0.1224
0.1029
0.0814
0.1688
0.1243
0.1139
-0.0873
0.1145
0.0872
0.0940
0.0567
0.0586
0.0667
0.0795

Suppose that PMs or

strategies are stopped-out
under the IID Normal
assumption, at levels
consistent with 1 = 0.05.
Because the IID Normal
assumption is wrong, the
effective probability of false
positives (2 ) is much
greater. Thus, most firms
evaluating their PMs
performance through
Sharpe ratio etc. are
improperly stopping-out
skillful PMs.

In some cases, firms may be firing more than three times the number
of skillful PMs, compared to the number they were willing to accept
under the (wrong) assumption of returns independence.
30

The high cost of simplified Math (4/4)

This chart plots
Penance for hedge
fund indices with
various .

HFRIFWIC Index
HFRIFWIJ Index

2.9

HFRIEMLA Index

HFRIFOFM Index

HFRIEMA Index

HFRISTI Index

HFRIFWIG Index
HFRIENHI Index

HFRIEM Index
HFRIFOFS Index

2.7

HFRIFOFD Index

HFRIMI Index

2.5

HFRIEHI Index

HFRICAI Index

HFRIEMNI Index

Penance

HFRIFOF Index

HFRIFWI Index

2.3

HFRIFIHY Index
HFRIFOFC Index

2.1

HFRIEDI Index

1.9
HFRIDSI Index
HFRIFI Index

HFRIMAI Index

1.7
HFRIRVA Index

1.5
0.0

0.1

0.2

0.3

Phi

0.4

0.5

0.6

Although positive
serial correlation leads
to greater drawdowns,
longer and longer
periods under water,
Penance may be
substantially smaller. In
particular, Penance is
smaller the higher
(Phi) and the higher

the ratio (Mean

divided by Sigma).
31

SECTION VI
Conclusions

Conclusions (1/2)
1. Far from being a theoretical argument, wrongly assuming
that returns are IID Normal has measurable costs to firms
and investors.
2. Assuming IID Normal returns leads to the Triple Penance
rule: Regardless of the Sharpe ratio of a strategy, it takes 3
times longer to recover from a maximum drawdown than to
produce it, with the same confidence level.
3. However, taking serial dependence into account leads to
Penance lower than 3x.
4. In particular, under first-order auto-correlation, Penance is
lower the greater the Sharpe ratio and also the greater the
serial dependence.
33

Conclusions (2/2)
5. In some hedge fund strategies, if the accepted probability of
false positives was 5%, the actual rate at which skillful PMs
are fired is up to three times greater.
6. This is extremely costly: If two out of three PMs are wrongly
fired

the firm will have to replace them.

nothing guarantees that the new PMs have superior skills.
the new PMs will not own the loss, and will be paid for every
new dollar they make.

7. There is a % loss on the drawdown for each false

positive. For a large firm, this amounts to tens of millions of
dollars lost annually, as a result of wrongly assuming that
returns are IID Normal.
34

THANKS FOR YOUR ATTENTION!

35

SECTION VII
The stuff nobody reads

Bibliography (1/4)

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constraint. Journal of Banking and Finance, pp. 3171-3189.
Bailey, D. and M. Lpez de Prado (2012): The Sharpe Ratio Efficient Frontier.
Journal of Risk, 15(2), Winter, 3-44. Available at http://ssrn.com/abstract=1821643.
Brooks, C. and H. Kat (2002): The statistical properties of Hedge Fund index
returns and their implications for investors, Journal of Alternative Investments,
5(2), pp. 26-44.
Chekhlov, A., S. Uryasev and M. Zabarankin (2003): Portfolio optimization with
drawdown constraints, in B. Scherer (Ed.): Asset and liability management tools.
Risk Books.
Chekhlov, A., S. Uryasev and M. Zabarankin (2005): Drawdown measure in
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Cherny, V. and J. Obloj (2011): Portfolio optimization under non-linear drawdown
constraints in a semi-martingale financial model. Technical Report, Mathematical
Institute, University of Oxford.
37

Bibliography (2/4)

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constraints. in IMA Lecture Notes in Mathematics and Applications, Vol. 65, pp.
77-88.
Getmansky, M., A. Lo and I. Makarov (2004): An econometric model of serial
correlation and illiquidity in hedge fund returns. Journal of Financial Economics,
Vol. 74, pp. 529-609.
Grinstead, C. and Snell (1997): Introduction to Probability. American
Mathematical Society, Chapter 7, 2nd Edition.
Grossman, S. and Z. Zhou (1993): Optimal Investment Strategies for controlling
drawdowns. Mathematical Finance, Vol. 3, pp. 241-276.
Hamilton, J. (1994): Time Series Analysis. Princeton, Chapter 4.
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Jorion, P. (2006): Value at Risk: The new benchmark for managing financial risk.
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Lo, A. (2002): The Statistics of Sharpe Ratios. Journal of Financial Analysts, Vol.
58, No. 4, July/August.
38

Bibliography (3/4)

Lpez de Prado, M. and A. Peijan (2004): Measuring the Loss Potential of Hedge
Fund Strategies. Journal of Alternative Investments, Vol. 7(1), pp. 7-31. Available
at http://ssrn.com/abstract=641702.
Lpez de Prado, M. and M. Foreman (2012): Markowitz meets Darwin: Portfolio
Oversight and Evolutionary Divergence. Working paper, RCC at Harvard University.
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Magdon-Ismail, M. and A. Atiya (2004): Maximum drawdown. Risk Magazine,
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Mendes, M. and R. Leal (2005): Maximum drawdown: Models and applications.

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73-76.
40

Bio
Marcos Lpez de Prado is Senior Managing Director at Guggenheim Partners. He is also a Research
Affiliate at Lawrence Berkeley National Laboratory's Computational Research Division (U.S. Department
of Energys Office of Science).
Before that, Marcos was Head of Quantitative Trading & Research at Hess Energy Trading Company (the
trading arm of Hess Corporation, a Fortune 100 company) and Head of Global Quantitative Research at
Tudor Investment Corporation. In addition to his 15+ years of trading and investment management
experience at some of the largest corporations, he has received several academic appointments,
including Postdoctoral Research Fellow of RCC at Harvard University and Visiting Scholar at Cornell
University. Marcos earned a Ph.D. in Financial Economics (2003), a second Ph.D. in Mathematical
Finance (2011) from Complutense University, is a recipient of the National Award for Excellence in
Academic Performance by the Government of Spain (National Valedictorian, 1998) among other awards,
and was admitted into American Mensa with a perfect test score.
Marcos is the co-inventor of four international patent applications on High Frequency Trading. He has
collaborated with ~30 leading academics, resulting in some of the most read papers in Finance (SSRN),
three textbooks, publications in the top Mathematical Finance journals, etc. Marcos has an Erds #3 and
an Einstein #4 according to the American Mathematical Society.

41

Disclaimer
The views expressed in this document are the authors
and do not necessarily reflect those of the
organizations he is affiliated with.
No investment decision or particular course of action is
recommended by this presentation.
All Rights Reserved.

42

Notice:
The research contained in this presentation is the result of
a continuing collaboration with
Prof. David H. Bailey, LBNL
The full paper is available at:
http://ssrn.com/abstract=2201302
For additional details, please visit:
http://ssrn.com/author=434076
www.QuantResearch.info