Dynamic Portfolio Allocation Using Rolling Drawdown Controls

Summary

The article describes REDD-COPS, a dynamic allocation method designed to constrain rolling portfolio drawdown while pursuing long-term growth. It replaces a lifetime peak-to-trough reference with a rolling economic maximum, then adjusts exposure to risky assets according to the drawdown gap, expected Sharpe ratios, and volatility estimates. The remaining allocation goes to a risk-free asset. Tests use U.S. equity, long Treasury, and commodity indexes, with Treasury bills as the cash proxy; the risk-based version updates volatility estimates and reallocates monthly.

Historical tests from 1992 to 2011 report that the risk-based approach generally compared favorably with fixed allocations and variants using constant inputs, while monthly rebalancing outperformed more frequent schedules in the cited comparison. These are backtest findings, not forward guarantees. Results rely on historical estimates, assumptions about asset behavior and low cross-asset correlations, and substantial leverage financed at the risk-free rate. Some cases slightly exceeded the drawdown target, and actual borrowing costs or derivative decay could reduce returns. The rolling window’s suitability may also depend on market-cycle length.

Key ideas

• REDD-COPS uses a rolling drawdown measure to scale exposure to risky assets dynamically.
• The framework allocates residual capital to a risk-free asset and can use leverage.
• The tested strategy estimates asset volatility dynamically and rebalances monthly.
• The reported historical results are sensitive to market assumptions and do not guarantee future performance.
• Borrowing costs, derivative decay, and occasional breaches of the drawdown target limit practical results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.