Decisions relating to portfolio rebalancing, while often considered secondary to deciding on the allocations themselves, can be considered an active investment strategy and have important implications for expected (and realized) portfolio returns and risk.
In this article we address common misconceptions about the role and implications of rebalancing, particularly in the context of actively-managed portfolios. These include the so-called “rebalancing premium” and the impact of rebalancing on the expected performance of risk-targeted and levered portfolios. A companion article (Ilmanen and Maloney (2015)) examines the rebalancing of strategic asset portfolios.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.