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Dynamic allocation strategies for absolute and relative loss control

Author

Listed:
  • Mantilla-García, Daniel

    (EDHEC-Risk Institute and the head of research & development at Koris International)

Abstract

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

Suggested Citation

  • Mantilla-García, Daniel, 2014. "Dynamic allocation strategies for absolute and relative loss control," Algorithmic Finance, IOS Press, vol. 3(3-4), pages 209-231.
    • Handle: RePEc:ris:iosalg:0032
    as

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    More about this item

    Keywords

    Risk management; portfolio insurance; hedging overlay; loss aversion; Benchmarks;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

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