Up: 3:3-4

Dynamic allocation strategies for absolute and relative loss control

Daniel Mantilla-GarcĂ­a

Algorithmic Finance (2014), 3:3-4, 209-231
DOI: 10.3233/AF-140040

Published: Abstract, PDF.
Archived: SSRN.


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.

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AT&T Labs Research

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Massachusetts Institute of Technology

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Wolfram Research

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California Institute of Technology

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Georgia Tech

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University of Virginia

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University of Lugano

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University of California, San Diego

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