Risks (Maximum Drawdown)

Currently, Teahouse offers strategies in high, medium, and low-risk categories. The metrics to measure each individual strategy differ slightly, but Maximum Drawdown (MDD) is a good common indicator to quantify risks. Before participating in a strategy, users must evaluate their own tolerance to risks and understand what the strategy does at a hight level. Below we provide more information about Maximum Drawdown.

Maximum Drawdown = (Peak value before largest drop - Lowest value before new high established) / (Peak value before largest drop)

• Maximum drawdown (MDD) is a measure of an asset's largest value drop from a peak to a trough.

• Maximum drawdown is considered to be an indicator of downside risk, with large MDDs suggesting that down movements could be volatile.

• For Teahouse strategies, we calculate the MDD of the share token price instead of the total portfolio value.

e.g.: Assume that an investment portfolio has an initial value of $500,000. The portfolio increases to $750,000 over a period of time, before plunging to $400,000 in a ferocious bear market. It then rebounds to $600,000, before dropping again to $350,000. Subsequently, it more than doubles to $800,000. What is the maximum drawdown? The maximum drawdown in this case is MDD = (750000 - 350000) / 750000 = 53.33%

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