What are the risks of deleveraging a leveraged long/short equity portfolio when going into a drawdown at certain drawdown stops, like deleveraging by 30% when breaching a -5% drawdown, deleveraging a further 30% when breaching a -10% drawdown?

Is active de/releveraging in and of itself considered to be a risk management tool and are there any academic treatises available on this?

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    $\begingroup$ At the risk of saying the obvious, if you deleverage and your portfolio continues to do poorly you are better off but if you deleverage and your portfolio does well you will regret the decision to deleverage because you will have impeded your recovery. So it depends on the nature of your portfolio returns autocorrelation. $\endgroup$ – Alex C Apr 3 '16 at 0:34
  • $\begingroup$ Another risk is that you may deleverage at the same time as other funds who are following a similar risk management rule, leading to some crowded exit trades. If this seems unlikely google "what happened to the quants in august 2007" for a real life example. $\endgroup$ – Alex C Apr 3 '16 at 2:42
  • $\begingroup$ To counter the risk of impeding recovery, I've seen an interesting approach that uses a mix of long-term and short-term de/releveraging. If results over the longer time horizon are poor, the percentage of the account in play is reduced/increased. If there is a good/bad run of results in the short-term, the risk applied to the percentage of the account in play is increased/decreased quite rapidly. The originator of this idea claims it can be tuned to reduce variance without impacting on overall growth. Haven't tested this yet, but it's on the bucket-list. $\endgroup$ – Tullochgorum May 23 '16 at 9:48

By chance I became aware that this is generally known as "trading the equity curve". More information can be found at this blog [1] of a former AHL researcher. He is also looking for more information on academic treatises.

[1] https://qoppac.blogspot.co.uk/2015/11/random-data-evaluating-trading-equity.html

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