
Drawdown control
Containment of drawdowns and optimization of performance ratios for multi-asset portfolios is critical for trading strategies. Alas, short data series or structural changes often render estimates of covariance matrices unreliable. A popular solution is risk-parity with volatility targeting. An alternative is ‘MinMax’ drawdown control, which builds on a broad interpretation of drawdowns as maximum actual or opportunity losses from not adjusting a benchmark portfolio to a specific underlying asset. In the case of one risky and one safe asset, this boils down to managing simultaneously the risks of conventional PnL drawdowns and foregone risk returns. Optimal asset allocation depends only on aversion to different types of drawdowns. Averaging over a plausible range of aversion parameters gives a model portfolio. Empirical evidence for the case of cryptocurrencies suggests that in an environment of uncertain returns MinMax delivers better PnL return-to-drawdown ratios than conventional volatility control.