Pain Index & Pain Ratio: Measuring Drawdown Depth AND Time Under Water

Why Max Drawdown and Calmar ignore how long capital stays trapped underwater

Two funds that both drop 10% from peak look identical under Maximum Drawdown (10%)—even if Fund A rebounds in one month while Fund B languishes 10% below its high-water mark for two straight years! Thomas Becker and Zephyr Associates introduced the Pain Index as the discrete integral of the underwater curve: Pain_Index = (1 / N) * SUM_{t=1..N} ((Peak_t - NAV_t) / Peak_t), averaging percentage capital loss across ALL N dates (including 0% at new highs).

Test this directly on a 5-month NAV curve [100, 120, 108, 114, 126]: drawdowns from running MAX($B$2:B2) are [0%, 0%, 10%, 5%, 0%], so Max Drawdown = 10.00% and Pain Index = 15% / 5 = 3.00% (Pain Ratio = (12% - 3%) / 3% = 3.00). Now stall month 4 at 108 instead of 114: Max Drawdown stays frozen at 10.00%, whereas Pain Index rises to 4.00% and Pain Ratio drops to 2.25!

Running High-Water Mark & Percentage Underwater Formula

Anchor $B$2 in MAX($B$2:B2) to track the cumulative NAV peak and compute (Peak_t - NAV_t) / Peak_t per row.

=(MAX($B$2:B2) - B2) / MAX($B$2:B2)

Pain Index & Zephyr Pain Ratio Formula

Average the underwater column AVERAGE(D2:D6) for the Pain Index, and divide excess annualized return (F2 - F3) by Pain Index when strictly positive.

=IF(AVERAGE(D2:D6) = 0, "ZERO_DRAWDOWN", ROUND((F2 - F3) / AVERAGE(D2:D6), 4))

Further reading

• Arte Sheets Guide — Sterling Ratio & Burke Ratio Multi-Drawdown Risk-Adjusted Return
• CFA Institute — Drawdown-Based Portfolio Risk Measures (Pain Index & Pain Ratio)