Affiliations: [a] Koris International, Immeuble Néri, Biot, France | [b] EDHEC-Risk Institute, Promenade des Anglais, Nice, France
Correspondence:
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Corresponding author: Daniel Mantilla-García, Koris International, 200 avenue de Roumanille, Immeuble Néri, 06410 Biot - France. Tel.: + 33 (0)4 88 72 88 32; E-mail: [email protected]
Note: [1] The author is a research associate at the 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.
Keywords: G11, G110
Keywords: Risk management, portfolio insurance, hedging overlay, loss aversion, Benchmarks
