Dynamic Allocation Strategies for Absolute and Relative Loss Control

Daniel Mantilla-García: The maximum drawdown control strategy dynamically allocates wealth between cash and a risky portfolio, keeping losses below a chosen pre-defined level.

Author(s):

Daniel Mantilla-Garcia

Research Associate, EDHEC-Risk InstituteHead of Research & Development, Koris International

This paper introduces variations of the strategy, namely the excess drawdown and the relative drawdown control strategies. The excess drawdown control is a more flexible strategy that can cope with common (re)allocation restrictions such as lock-up periods, cash bans or liquidity constraints through an implementation with a hedging overlay. The relative drawdown control strategy is adapted to contexts in which investors seek to limit benchmark underperformance instead of absolute losses. A formal proof that the loss-control objectives introduced can be insured using dynamic allocation is provided and the potential benefits and implementation aspects of the strategies are illustrated with examples.

Type: Working paper
Date: le 14/07/2014
Research Cluster : Finance

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