Rebalancing A Global Policy Benchmark : How To Profit From Necessity
- Topics:
- Commercial Lending
- Tags:
- Asset Class,
- First Quadrant,
- Management,
- Rebalancing,
- Strategy
- Source:
- First Quadrant
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Overview: A buy-and-hold strategy leads to a drifting portfolio mix that is both difficult to justify and unprofitable when compared to the appropriate alternative. Rebalancing is imperative from a risk control standpoint and is the only passive option that systematically addresses the policy benchmark. Even though a drifting mix may appear to outperform in a strongly trending market, in which one asset class dominates all others, rebalancing still wins relative to drifting mix strategies with similar risk; it is difficult to find a scenario in which rebalancing fails to outperform on a risk-adjusted basis. Rebalancing strategies also consistently outperform drifting mix strategies at times when the major asset classes have similar levels of return. This paper discusses three elements in the process of enhancing the returns to a rebalancing strategy. The first is the decision on rebalancing frequency and methodology. One option is to undertake daily rebalancing, which will add value most during turbulent periods and will perform similarly to longer-term rebalancing approaches over most multi-year windows. Secondly, an approach that seeks to shift the frequency of rebalancing in an opportunistic fashion, through tactical rebalancing, presents clear benefits, when implemented in a disciplined fashion9. This is likely to merit additional consideration. Thirdly, when one expects a high-risk premium on equities, it may be beneficial to set one’s rebalancing benchmark to contain the maximum equity content consistent with one’s risk considerations.
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Format: PDF | Size: 295KB | Date: Jan 2003 | Pages: 19
