Risk Metrics

A strategy with Sharpe 1.5 and max drawdown -55% will get shut down before it recovers. Reporting returns without drawdowns, tail risk, and duration metrics hides the path dependency that determines whether a strategy survives.

The Problem

Sharpe ratio is the default performance metric, but it treats upside and downside volatility equally and says nothing about tail losses. A strategy can have a high Sharpe while hiding a -40% drawdown that takes 18 months to recover. Fund managers and allocators care about max drawdown, time underwater, and worst-case losses - because those determine whether the strategy (and the fund) survives. Always report drawdown alongside return metrics.

The Pattern

WRONG

import numpy as np

returns = strategy_returns  # daily
sharpe = returns.mean() / returns.std() * np.sqrt(252)
print(f"Sharpe: {sharpe:.2f}")  # Looks great - ships it