As an illustration, the research points to a 32 per cent opportunity cost when managing maximum drawdown constraints inefficiently through an excessive level of hedging.
The authors of the study, Romain Deguest, Lionel Martellini and Vincent Milhau, draw two major conclusions from their work:
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Relatively simple solutions exist that can be implemented as dynamic asset allocation strategies in order to control short-term risk levels while maintaining access to long-term sources of performance.
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These solutions are a substantial improvement over traditional strategies without dynamic risk control, which inevitably lead to under-spending of investors' risk budgets in normal market conditions, with a strong associated opportunity cost, and over-spending of investors' risk budget in extreme market conditions.
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