The Case for Limiting Drawdowns Through Active Risk Management and Hedging: The Math Behind Efficient Compounding
Losses are asymmetric.
As the chart shows, a -10% loss only requires an 11% gain to recover, but a -50% loss demands a 100% return just to get back to breakeven. The deeper the drawdown, the more exponential the required recovery—this destroys compounding efficiency.
This is why we define risk in advance and actively cap drawdowns, especially beyond the ~15–20% range.
Below that threshold, capital can still recover reasonably well. Beyond it, recovery becomes a mathematical uphill battle.
To compound capital efficiently over time, downside risk must be actively mitigated. The key to long-term wealth creation isn’t just capturing upside—it’s protecting capital through asymmetric risk/reward positioning and strict portfolio risk exposure limits.
For more than two decades, the edge of Shell Capital has been risk mitigation through active risk management, drawdown controls, and asymmetric hedging. As a registered investment adviser, we manage your investment portfolio for you.
Contact us about ASYMMETRY® | Managed Portfolios, an alternative investment program beyond traditional asset allocation and ASYMMETRY® | Hedging, dynamic portfolio hedging with options for convex payoffs.