Dynamic allocation strategies for absolute and relative loss control

Daniel Mantilla-García ()
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Daniel Mantilla-García: EDHEC-Risk Institute and the head of research & development at Koris International, Postal: Koris International, 200 avenue de Roumanille, Immeuble Néri, 06410 Biot - France.
Authors registered in the RePEc Author Service: Daniel Mantilla Garcia ()

Algorithmic Finance, 2014, vol. 3, issue 3-4, 209-231

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.

Keywords: Risk management; portfolio insurance; hedging overlay; loss aversion; Benchmarks (search for similar items in EconPapers)
JEL-codes: C00 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ris:iosalg:0032

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