Don’t Look Down: Reflections on Cross-Asset Drawdowns

I’ve written a fair amount on the nature of equity drawdowns: the pain they cause, their anatomy, what things look like at the peak.¹ Here’s an attempt to expand the exercise to other portfolio assets and strategies. After all, you likely have other stuff in your portfolio, and you are therefore likely interested in what their drawdown profiles might look like, and how they interact.

Methodology

You’ve got to have a code, so they say, here’s mine:

1. A drawdown is 50% of annualised volatility, over an undetermined period of time
2. Drawdowns are felt daily, monthly data should not be used to examine them
3. Two drawdowns separated by a big jump higher are two drawdowns not one
   1. ‘A big jump’ is 100% of annualised volatility. Imagine equities fell from 100 to 90 (that’s a 10% decline, in case your mental maths is rusty), then rose to 108 (+20%), then fell again to 85 (-21%). That’s two episodes
4. Defining drawdowns is as much art as science
   1. You try and implement this creed in code – or indeed any other systematic formulation, I’ve tried a lot – you will always end up with some episodes that simply don’t pass the sniff test. The algorithm is the starting point, but I’ve then gone through and winnowed them, old school

I’ve done this for seven portfolio blocks: equities (proxied by the S&P 500, as per the prior notes mentioned), fixed income (proxied by rolling 10-year Treasury futures), gold (physical), Trend (15 vol, all asset), Value (Fama-French HML), Momentum (Fama-French Momentum) and Quality (AQR QMJ). You can see the results in graphical form in the Appendix, but more intuitively in the table in Figure 1.

Figure 1: Drawdown (DD) frequency and composition (top panel) and severity and duration (bottom panel)

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Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Bloomberg and Man Group. Date range: July 1926 - May 2026.

How different assets draw down

Figure 1 makes for interesting perusal. But for those of you who prefer a picture, Figure 2 shows the profile of an illustrative typical drawdown, using the average realised characteristics (depth, length, volatility on the way down and up, and so on). Allow me a brief word on each.

Equities

Equity drawdowns are relatively severe, but brief. The average nadir is the second deepest (after Gold) but the average descent length is also the second fastest (after Momentum). On the other side, they are unrivalled in terms of the speed of the recovery, at usually less than five months on average. This means that, taking the fall and the bounce back as one combined event, their average episode is the shortest of all the assets in our survey. They are also distinctive in terms of the contrast between volatility in the drawdown, and outside of it. Stocks run at 15% volatility in normal times, but 24% in sell-offs, a nine-point spread well in excess of all the comparators. Practical implication: investors should be particularly wary of false dawns during red zones in their portfolio’s equity beta.

Bonds

Bond drawdowns are interesting in terms of the proportion of history they cover. On our definition, bonds are in an episode almost half the time, even if the absolute numerical frequency, at one every 23 months, is in line with that of Equities and Trend. These declines tend to be moderate, and not particularly volatile, realised risk in the down market is almost identical to normal times risk. This tallies with the market folklore that bonds, in contrast to stocks, grind lower and crash up, at least with regard to the move down. Monetary tightening tends to be well telegraphed (while loosenings often come by surprise), and these frequent but gentle performance declines are within that grain.

Gold

Gold drawdowns are arguably the most unpleasant of all, tending to be both longer (1.5 years on average) and deeper (down almost a third) than other assets. Moreover, recovery time is significantly slower; a mean of 1.3 years is double any of the others, with the exception of Momentum (0.9). The one redeeming feature, if you can call it that, is that the downdraft tends to be relatively orderly. In fact, the volatility of the yellow metal in the drawdown (18%) is actually lower than in normal times (20%), a counterintuitive result, but speaking to the fact that this is the kind of pain that is long and grinding, rather than a short sharp one. Is a marathon more painful than the 1500 metres? You pays your money, you takes your choice. In any event, these characteristics make sense for an asset largely lacking in economic fundamentals, and therefore highly susceptible to real or perceived regimes, and narrative trading. Some stories can last a long time.

Trend

Trend drawdowns are distinctive in that they are heavily tilted toward smaller sell-offs. Despite having overall volatility not hugely dissimilar to equities, defining small / medium / large thresholds at the same level (10/20/30%) puts almost 90% in the ‘small’ category. This likely speaks to the dynamic nature of the strategy: like Kipling’s leopard, it can change its spots as the environment changes, although it should be noted that its few large bear markets do come around major regime inflection points, and none more profound than the start of World War II. There is also a similar pattern to Gold, in that volatility within down-moves tends to be less than that outside them, only here the pattern is more extreme, at 160 basis points (bps) below (10.9% plays 12.5%). This is largely by design, given that vol. scaling is meant to reduce exposures as the market’s overall risk patina increases.

Value

Like Fixed Income, Value also tends to spend a lot of its time in drawdown posture, at 45%, only two points short of the former. Remember that value-investing is a contrarian bet on intrinsic book value being recognised in market value, and with greater emphasis than long term expected cashflows. Anyone who’s spent any time in the school playground will have learned the hard way that, most of the time, being contrarian doesn’t work, even if the few times it does are spectacular.

Momentum

Momentum, on the other hand, usually spends the least proportion of its time in drawdown (20%), for exactly the same reason. Unlike Trend (to which it is positively correlated over long periods, as well as in drawdowns, as we shall see later), its drawdown profile is skewed towards the larger nadirs (which represent 60% of the total). These tend to be extremely short and sharp, with the average length of six months – the quickest in our list. The average magnitude is in line with stocks, and the biggest fall of 63% (the market pivot at the tail-end of the Global Financial Crisis [GFC]) was deeper than any, bar equity. Watch someone go through a mid-life crisis; when a contrarian pivot comes, it is often fast and profound.

Quality

Quality drawdowns have a bit of a regime-feel to them. While in general moderate and relatively rare, the strategy has both the longest drawdown (the seven years in the 1960’s tech hype cycle prior to the Nifty Fifty boom) and the longest gap between drawdowns (over a decade, from 1980 to 1992) of any that we have surveyed. It is also an outlier in terms of the containment of the extremes: its largest decline (the 31% fall through the post-GFC recovery) is smaller than any of the other maximums. Given a disciplined commitment to elevate metrics of income statement or balance sheet quality, there’s only so wrong you can go it seems.

An average covers a multitude of sin, so, of course, there are exceptions to the characterisations of these drawdowns. Try telling an investor going through the almost three year equity drawdown between 1929-1932 that stock market crashes are sharp but short. Still, hopefully the above can provide a helpful base rate to cue off when you’re in the teeth of one.

Figure 2: Stylised drawdown profiles

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Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Bloomberg and Man Group. Date range: July 1926 - May 2026.

How drawdowns interact

As already alluded to, your reality is that you probably hold these assets together, rather than in isolation. More useful to you then is perhaps how these various bad times intersect with one another, across assets. Figure 3 shows, of the seven outlined in Figure 1, how many were in drawdown on each day over the full overlapping period. Shaded green if none of the seven were in drawdown, shaded various shades of orange if more than half were. Extremes on both ends are rare. There has never been a time where all seven have been in the doldrums. The times where even six are there are vanishingly rare, at 0.6% of history. Worth noting that four of the five (three in the 1970s and one in 2022) come in the context of large inflation accelerations. The Consumer Price Index (CPI) getting out of hand can make even a free lunch costly.

On the other hand, times where nothing is in drawdown are little more than 4% of history. Only three times in any protracted sense: the mid-1980s (the vanquishing of inflation and Reagan’s ‘Morning in America’), the mid-1990s (the foothills of the DotCom boom) and now. But don’t get too used to it, most of the time, something in your portfolio might not be working.

Figure 3: Number of assets in drawdown

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Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Bloomberg and Man Group. Date range: March 1968 - May 2026.

Figure 4 shows the correlation of each asset with that listed on the x axis, across all days where the latter is in drawdown. Let’s take the big negative relations first. Quality and Equity (again, using the S&P 500 Index as proxy) move very differently to each other when either is in a drawdown. When inputs like profitability, balance sheet robustness, conservative accounting and so forth are out of favour, it is often because Mr Market is in exuberant mood. No need for safety in such years of plenty.

There is also low tail dependence between Equity and Momentum, especially when viewed through Momentum crashes. This speaks to the factor often having its worst moments at points of equity turnaround, in the nadir of a crisis. Momentum also has a decently negative left-tail diversification with Value, I suspect for similar reasons. Value, as already mentioned, is philosophically contrarian. In general, it likes the big turning points of sentiment. Momentum is a bet on the future being similar to the recent past. To some extent, and very likely in the extremes, they are a mirror image.

Quality and Value also move quite inversely in Quality drawdowns. We’ve talked about Value as bet on short duration, near horizon intrinsic worth, the proverbial jam today. But there’s also an element of Value which tends toward cyclicality. The kinds of businesses that have lots of tangible assets tend to be relatively highly geared to the cycle. Miners, heavy industry, debatably financials. Not a healthcare stock with a research pipeline, or a software subscription concern. The former tend to have higher sensitivity to economic boom and bust. Even if you sector neutralise (which the Fama-French data does not) some of this effect will likely remain. As earlier discussed, a Quality drawdown often comes with Joseph’s seven fat cows; a time of economic abundance where these more cyclical stocks have potential to flourish.

Figure 4: Conditional correlations of other assets, by asset in drawdown

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Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Bloomberg and Man Group. Date range: July 1926 - May 2026.

There are three notable positive drawdown relations. Equity and Value tend to move together when the other draws down for the same cyclical beta rationale just discussed. Momentum and Quality do likewise which is harder to explain, but is perhaps a reflection of some of the big pivots out of bear markets (the GFC aftermath for instance, which contains the worst drawdown for both factors), where the pivot hurts continuation strategies, and the relief rally buoys beaten-up trash first.

The other major positively correlated overlap is between Momentum and Trend. This one seems straightforward, even if, as we have seen, the shape of the two in drawdown is very different, given both are betting on continuation of current patterns, it follows that if the rhythm is breaking down on a macro level, it is likely also breaking down in equity market internals.

Best and worst combinations

A final brief word on combinations, if you are optimising for drawdown risk. Figure 5 shows the potentially best and worst combinations of any three of the seven. The bars show the percentage point deviation from the proportion of time that each triplet have experienced drawdown overlap, to that proportion which would have occurred randomly, given the amount of time each individual asset has been in said state. So for instance: Fixed Income, Gold and Momentum have had overlapping drawdowns 6.8% of the time through history. You would expect this number to be 4.1% by chance alone, given the percent of time each spends there in isolation. So 6.8 minus 4.1 equals +2.7: the combination is a drawdown accelerant.

One interesting feature of Figure 5, as much as it pertains to the current market set-up, is the preponderance of gold at both the top and the bottom. It is in the three worst diversifying combinations, and the two best. The yellow metal remains many investors’ favoured hedge for the full gamut of crises, from war, to de-dollarisation, to fiscal sustainability. We’ve written in previous notes voicing some scepticism as to its efficacy,² at least on the historical evidence, but the lesson here might be, if you are going to hold it, be very thoughtful about what you combine it with. Gold plus Value plus Quality looks to be an admittedly impressive combination and has the added advantage today that while one-third of the portfolio would be very expensive, the other two remain at attractive valuations.

Figure 5: Three-asset drawdown overlap relations – top five crashing (pink) vs bottom give diversifying (green)

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Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Bloomberg and Man Group. Date range: July 1926 - May 2026.

Far be it from me to overpromise to you. You can be as well-versed as you like in these coincident drawdowns, there will always be something that surprises you. And anyway, you might complain, in a big equity sell-off, unless you’ve got a highly esoteric asset allocation, it’s still very likely that it’ll be an unpleasant experience, and we’re just arguing about degrees. There’s something in that. But in a big crisis, actually lived in real time, the importance of every percentage point is magnified. Imagine yourself down the pub with the lads after the AI bubble goes pop. Down 30 versus down 34 median. You’ll have a skip in your step and a twinkle in your eye. So yes, I do think it’s worth doing this homework now. And planning accordingly.

1. See, respectively, https://www.man.com/insights/road-ahead-on-pain, https://www.man.com/insights/road-ahead-preparing-for-equity-drawdowns and https://www.man.com/insights/road-ahead-golden-fears
2. See https://www.man.com/insights/road-ahead-gold and https://www.man.com/insights/road-ahead-such-great-heights

APPENDIX

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Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Asset class proxies as follows: equity, S&P 500; fixed income, rolling 10-year Treasury futures; gold, physical price; Trend, 15 vol all asset; Value, Fama-French HML; Momentum, Fama-French Momentum; Quality, AQR QMJ. Source: Bloomberg and Man Group. Date range: July 1926 - May 2026.