Understanding the Worst Peak-to-Valley Draw-Down: A Legal Perspective
Definition & Meaning
The term "worst peak-to-valley draw-down" refers to the largest percentage decline in the net asset value of a financial pool, account, or trading program over a specific period. This decline occurs when the net asset value at the end of a month drops significantly and is not regained by any subsequent month-end value. The draw-down is expressed as a percentage of the initial month-end net asset value, and it is important to note the specific months and years during which this decline occurred.
Legal Use & context
This term is commonly used in the context of investment management and financial regulation. It is particularly relevant for commodity pool operators and commodity trading advisors, as defined by the Commodity Futures Trading Commission (CFTC). Understanding draw-downs is crucial for investors assessing the risk and performance of their investments. Users can manage related documentation and reporting through legal forms available from US Legal Forms, which are designed to help individuals and businesses navigate these financial regulations.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A commodity trading account starts with a net asset value of $100,000 at the end of January. By March, the value drops to $70,000 and does not recover by the end of the year. The worst peak-to-valley draw-down would be a 30 percent decline.
Example 2: A mutual fund has an initial month-end net asset value of $50,000 in April. By June, it falls to $30,000 and remains below this level for the next six months. The worst peak-to-valley draw-down would be a 40 percent decline. (hypothetical example)