Portfolio Rebalancing: A Stable Source of Alpha?

Abstract

In this work we verify that portfolio rebalancing can generate an excess return under certain market conditions. In line with existing measures, developed specifically to capture that alpha (Rebalancing Bonus), we show that high volatility as well as low correlation maximize the magnitude of the excess return. However, in contrast to previous works, we demonstrate that the actual driver and therefore sufficient condition for a Rebalancing Bonus is the presence of relative mean-reversion. All results in the present note are supported via numerical simulations and a case study on global equities.

Keywords: rebalancing bonus, mean-reversion, portfolio rebalancing