Quant Corner

Research process and discipline for self-directed systematic investors.

Drawdown Recovery Math: Why You Need +42.9% After a −30%

September 3, 2026

TL;DR

The Recovery Table You Can’t Argue With

If you lose 30% of a $100,000 account, you have $70,000 left. Have a great next year and make 30% back, and you are at $91,000 — still 9% short of where you started. To restore the missing $30,000 you need to gain 30 on a base of 70, which is 42.857%. Call it +42.9%. That single number is why this article exists.

The full table reads like this: a −10% needs +11.1%, a −20% needs +25%, a −30% needs +42.9%, a −40% needs +66.7%, a −50% needs +100%, and if you ever give back 75%, you need to quadruple what is left. The pattern underneath is one formula: a loss of depth d leaves you with 1 − d, and repairing it requires a gain of d / (1 − d). The denominator keeps shrinking as the loss deepens, which is why the required gain grows so much faster than the loss did.

Almost everyone in markets knows this, and almost nobody sizes like it. Knowing is nodding along at a table; internalizing it changes the questions you ask about any strategy. Not just “what did it earn,” but how deep did it go, how long did the climb back take, and could you actually have stayed in for it. I have watched otherwise rational investors abandon sound rules at exactly the point where the recovery math said they needed to stay — because they had sized for the average year instead of for the hole.

Where Depth Quietly Destroys Compounding

A drawdown is not a one-time cost. It is a permanent tax on every later gain, because gains compound on whatever is left. Consider the classic round trip: 100 → 50 → 75 after a −50% followed by a +50%. The arithmetic average of those two years is 0%, yet the account is down 25%. Repeat the cycle and the portfolio compounds steadily lower even though the simple average says flat. That gap between the arithmetic mean and the geometric mean is the volatility drag, and drawdown depth is its main ingredient.

There is a time cost on top of the value cost. Suppose a strategy compounds at 19% a year — a number I will come back to shortly. A 30% hole then takes a little over two years of uninterrupted compounding to refill, and a 50% hole takes about four. Markets do not climb on schedule, so in practice plan on longer. Then add the two costs real investors carry that spreadsheets omit: withdrawals for living expenses, and the behavioral one. After a deep drawdown, many people cut risk or quit near the bottom, converting a paper loss into a permanent one. The recovery math assumes you stay invested. Staying invested is a discipline, not a formula.

This is also why backtest summaries deserve more respect for their drawdown column than their return column. A strategy that made 19% a year but fell 40% along the way and another that made 12% with an 8% worst case are not comparable on CAGR alone — the first one most holders will not survive emotionally, and the ones who do will spend years just getting back to zero before compounding resumes.

Size for a Drawdown You Can Actually Climb Out Of

So the sizing question is not “what allocation maximizes CAGR.” It is: what is the worst case, and can I still be here three years after it? My rule of thumb is to decide the deepest hole you could watch without breaking your process, then size so the strategy’s worst documented case fits inside it. If a 50% loss would make you sell, do not hold the position that can lose 50% — hold half of it and accept a lower ceiling, because a position you will abandon at the bottom has no expected value at all.

Risk budgeting is the institutional version of this idea. Instead of fixing the dollar amount in each asset, you fix a target volatility for the portfolio and scale positions inversely to each sleeve’s expected volatility. A 25% volatility target is a middle-of-the-road budget: in calm markets the strategy is allowed to hold more exposure, and in stressed markets it mechanically holds less. That is not a drawdown guarantee — volatility targeting reacts to realized volatility with a lag, and markets can gap straight through any target. But it converts drawdown depth from something discovered in hindsight into something designed, measured, and monitored in advance, which is exactly the posture the recovery table demands.

One more quiet drag belongs in this section: costs. Anything that shrinks your compounding base is mathematically indistinguishable from a small extra drawdown. A fixed research fee, a fund expense ratio, or slippage on every rebalance all extend the time a given hole takes to refill. When you compare strategies, compare them net of every cost you can name, because recovery arithmetic punishes the base it compounds on.

A Case Study in Trading Depth: A 25% Vol Target

Kairos Trading publishes a system — Volatility Target Managed Rotation — that is a clean, documented example of this exact trade. The name states the design: a 25% volatility target run with S&P 500 exposure through SPY and its 2× counterpart SSO, plus a BIL sleeve of short-term Treasury bills acting as ballast. In the published backtest from February 2016 through September 2026, $10,000 grew to $63,338.9: a 533.4% total return at a 19.1% CAGR, with a maximum drawdown of 31.4%. Over that same window, the 60/40 SPY/AGG benchmark drew down 20.1% at its worst, and buy-and-hold SPY drew down 33.7%.

Now run the recovery table over those numbers, because this is where the trade becomes explicit. Repairing the system’s 31.4% worst case requires +45.8%. SPY’s 33.7% hole requires +50.8%. The 60/40’s shallower 20.1% needs only +25.2%. So the 25% vol target with a leveraged sleeve was not a low-drawdown product by 60/40 standards: it carried a deeper worst case than a bond-heavy mix, and its Sharpe of 0.81 landed between SPY’s 0.87 and 60/40’s 0.80. What it did over the period was compound at 19.1% a year for a decade plus while keeping its worst drawdown slightly shallower than simply holding SPY, inside a defined risk budget rather than an unmanaged one. That is the honest deal on offer: you rent out a bounded amount of depth, and you get compounding in return.

Read the caveats with the same care you read the returns. The long record is a backtest. “Based on backtest; not a guarantee” is the publisher’s own framing on every strategy card, and this system’s out-of-sample clock only started on January 1, 2026 — the impressive decade is simulated, and live history is short. Leveraged sleeves carry their own mechanics and costs that backtests routinely understate. None of that makes the case study useless; it makes it a case study. Recovery math simply tells you the entry price: if you cannot sit through the +45.8% repair that a 31.4% hole demands, this system is too deep for you at any CAGR.

Depth is also a spectrum rather than a single setting. The same publisher’s flagship, Leader Rotation, showed a 6.7% maximum drawdown at a 29.0% CAGR in its backtest — admittedly a much shorter one, about two and a half years through August 2026. Two products, two recovery profiles, the same style of documentation. Choosing between them is really a choice about which hole matches your threshold for staying in, which is the whole argument of this article.

Build It Yourself, or Stand on Someone Else’s Backtest

Nothing above requires you to buy anything. The DIY route is real: write the vol-target logic yourself, test it on data you trust, and stay brutally honest about overfitting, survivorship, and data errors. That craft is this blog’s subject, and it is deeply rewarding. It is also slow, and the mistakes are expensive when they happen in live money.

Which brings me to the source I point readers to when they decide not to build everything alone: kairostrading.net. It is a curated, documented alternative — the publisher publishes out-of-sample start dates for every strategy, complete portfolio reports with performance, holdings, signals, and trade history, and a Learn section with guides on systematic investing and on flat-fee versus AUM economics. It operates as a research publisher rather than an adviser: members keep custody of their capital and execute in their own brokerage accounts, membership is application-based, and each strategy is offered at a flat $100 per month. Volatility Target Managed Rotation is one of the four systems currently offered to new members at that price, and the published minimum-capital figures are fee-coverage estimates rather than required minimums — $14,000 in its case. The smaller the account, the larger a fixed fee is as a fraction of assets, which is exactly the kind of compounding drag the recovery math punishes, so fee coverage belongs in the same spreadsheet as drawdowns.

So end where the arithmetic started. Decide the deepest hole you can survive, look for a system whose documented worst case fits inside it, and size so the recovery math still works when markets are at their least cooperative. Whether you build your own volatility-targeted rotation or stand on the documentation published at kairostrading.net, the discipline is the same: choose depth first, and let the returns be the consequence.

Disclaimer: This blog is for educational and informational purposes only. Nothing here is investment advice. Past performance does not guarantee future results. Trading involves risk of loss.