The expected annualized return of a fund is affected by many factors. As an investor, you need to understand relevant financial management knowledge to reduce capital losses at critical moments. So what does the maximum drawdown in a fund mean?

How to prevent conflicts of interest in funds? What does the absolute expected annualized expected return strategy fund mean?

What is the maximum drawdown in the fund?

In addition to paying attention to the fund manager's expected annualized return creation ability, fund investors also need to pay attention to risk control capabilities, and the maximum drawdown is a very good measurement indicator. The maximum drawdown refers to the maximum amplitude from the peak to the bottom of the fund's net value curve. This indicator tests the fund manager's ability to grasp risks and trends.

However, it is not comprehensive to only use the maximum drawdown of a fund to measure the quality of a product. The maximum drawdown of a fund is affected by the market environment experienced, the investment philosophy of the fund manager and other aspects. The retracement is not terrible. What is important is whether the net value can come back to life after the retracement.

Factors affecting drawdowns:

Private equity fund managers mainly use three methods to control drawdowns: stock selection, hedging and position control. Choosing stocks with a margin of safety is the first priority in controlling drawdowns. A-share retail investors account for a large proportion, and the overall market sentiment fluctuates violently. Any concept or theme, whether true or false, as long as it is new and dazzling enough, can cause huge speculation in the short term, but it is often followed by a sharp fall. The game of drumming and passing flowers is undoubtedly a disaster for investors who are not quick with their hands and feet. Therefore, institutions such as Danshui Quan and Gao Yi advocate reverse investment, pay attention to the margin of safety, conduct in-depth research and buy ginseng at "radish prices", thus avoiding the panic that is almost inevitable after the drumbeat stops.

When fund managers firmly believe in the value of the stocks they hold and face systemic risks, hedging using stock index futures is almost the best way to control risks. During the stock market crash, various types of stocks gathered together, and the use of stock index futures was restricted. Position control became the last valve to control the drawdown.

The large retracement of the net value of private equity funds cannot be entirely attributed to problems with the risk control system. In extremely bad markets, private equity funds that select individual stocks suffer more. They will not follow the trend. Fund managers who send funds will add or reduce positions according to the rise and fall of the market, so the net worth will temporarily fall sharply. However, after a decline, the fund's ability to rebound, that is, whether the stocks selected by the fund manager were wrongly sold or have poor fundamentals, determines the future fate of the fund. Although for private equity funds that select individual stocks, a large net value retracement is a flaw, but it is not a fatal flaw. The real fatal injury is enduring the large retracement of selected stocks, but not enjoying the large gains of selected stocks.

In short, volatility is not a risk, choosing the wrong stock is the real risk.

No matter how it is defined, at least these two points are the mainstream understanding:

1. The smaller the maximum retracement, the better;

2. Retracement and risk Directly proportional, the larger the retracement, the greater the risk; the smaller the retracement, the smaller the risk.