Portfolio Construction

Portfolio Rebalancing, Part 1: Strategic Asset Allocation

Topics - Portfolio Construction Portfolio Risk and Performance

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Portfolio Rebalancing, Part 1: Strategic Asset Allocation

AQR White Paper

This paper shows that many reasonable rebalancing processes may achieve similar benefits of maintaining a portfolio’s risk characteristics, but also that price momentum effects can benefit some processes more than others.

  • The authors seek to confirm that rebalancing to target allocations helps to maintain more stable portfolio risk characteristics and improved diversification, and to show that many different methods confer similar long-term risk benefits.
  • Rebalancing can be considered an active contrarian strategy when compared to a buy-and-hold benchmark.
  • The authors discuss the main considerations when designing a rebalancing process, and use a simple empirical analysis to demonstrate the drivers of relative performance over four decades.
  • Asset prices have tended to exhibit trending behavior, and this has favored less-frequent rebalancing schedules or wider tolerance bands, which allow trends to play out between rebalances .

When designing a rebalancing process, investors should balance their tolerance for short-term variations in portfolio weights against their expectation or belief that multi-month price momentum effects will continue in the future. For liquid portfolios, cost considerations may be secondary.


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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.

 

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