Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints

Under the supervision of Professor Lionel Martellini, Scientific Director of EDHEC-Risk Institute, this chair examines the properties of dynamic asset allocation strategies in asset-liability management. Indeed, this document provides comprehensive insights into all of EDHEC-Risk Institute’s research on dynamic allocation in asset-liability management. The publication builds on these previous findings and illustrates that failing to separate long-term risk-aversion and short-term loss-aversion may lead to poor investment decisions. Relatively simple solutions exist that can be implemented as dynamic asset allocation strategies in order to control shortterm risk levels while maintaining access to long-term sources of performance. These solutions are a substantial improvement over traditional strategies without dynamic risk-control, which inevitably lead to underspending of investors' risk budgets in normal market conditions, with a strong associated opportunity cost, and over-spending of investors' risk budget in extreme market conditions.