white papers
Drawdown control solutions: beware opportunity costs
Portfolio Manager
Deputy CIO, Multi Asset
Portfolio Manager
There is no such thing as a free lunch when insuring a portfolio against drawdowns. Various solutions that deliver stronger downside protection1 also tend to be associated with higher opportunity costs.
For instance, solutions used to limit drawdown, such as volatility targeting and Constant Proportion Portfolio Insurance (CPPI), both have drawbacks.
We approach drawdown control with a view to minimizing opportunity costs while delivering downside protection. We propose two methods based on the idea of balancing absolute and relative drawdown solutions.
No single solution is perfect in all situations, therefore our approaches are tailored to cover a wide spectrum of applications.
Our solutions can help investors balance both costs and benefits. We believe that the optimal portfolio insurance strategy should deliver the required downside protection without sacrificing potential opportunities.
Please find key terms in the glossary.
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1 Capital protection represents a portfolio construction goal and cannot be guaranteed.
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