Short term risk control not incompatible with long term investment performance – EDHEC

Adjusting asset allocation to control short term risk need not impact on long term investment performance, according to latest research published by EDHEC Business School’s research facility EDHEC-Risk Institute.

The publication Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints looked at the short versus long term challenge, because of consensus that investors with longer term outcomes in mind may be more partial to higher exposure to risk assets, such as equities, but which can in the short term cause problems of risk.

However, the research authors Romain Deguest, Lionel Martellini and Vincent Milhau, concluded that “while it is widely perceived that a tension exists between a focus on hedging long term risk and a focus on insurance with respect to short term constraints, we cast new light on this debate by arguing that long term objectives and short term constraints need not be mutually exclusive.”

The authors conclude that there are “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,” and that “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.”

To read the full report and analysis click here: [asset_library_tag 6536,Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints]


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