Pain Index

The Pain Index, popularised by Becker and Lim, is the simple arithmetic average of the drawdown series. Where Maximum Drawdown captures the worst single event and the Ulcer Index emphasises duration via squaring, the Pain Index gives the "typical" drawdown an investor lives through over the window.

Formula

PI = mean( DD_t )      where DD_t = (V_t − M_t) / M_t

Both V_t and M_t are the portfolio value and running maximum at time t. PI is a negative number; absolute value gives the average percentage by which the portfolio is below its running peak.

Pain Index vs Ulcer Index

PI is the linear average of drawdowns; UI is the root-mean-square. Two strategies with identical PI can have very different UI — the one with rare deep drawdowns has the higher UI. Report both: PI for the average lived experience, UI for the "do I hit a margin call" question.

The Pain Ratio

Excess return divided by Pain Index gives the Pain Ratio — analogous to Calmar but using the average drawdown instead of the worst single one. Useful when the worst drawdown is an outlier that distorts Calmar.

How MEDGE Capital uses the Pain Index

Pain Index is reported in every portfolio analysis alongside Max DD, Ulcer Index and Calmar / Pain Ratio — the four-number drawdown panel that gives the full picture of how the strategy experiences losses.