Strategic Rebalancing

25 Pages Posted: 17 Feb 2019 Last revised: 20 Dec 2019

See all articles by Sandy Rattray

Sandy Rattray

Man Group plc

Nicolas Granger

Man AHL

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Otto Van Hemert

Man AHL

Date Written: December 19, 2019

Abstract

A mechanical rebalancing strategy, such as a monthly or quarterly reallocation towards fixed portfolio weights, is an active strategy. Winning asset classes are sold and losers are bought. During crises, when markets are often trending, this can lead to substantially larger drawdowns than a buy-and-hold strategy. Our paper shows that the negative convexity induced by rebalancing can be substantially mitigated, taking the popular 60-40 stock-bond portfolio as our use case. One alternative is an allocation to a trend-following strategy. The positive convexity of this overlay tends to counter the impact on drawdowns of the mechanical rebalancing strategy. The second alternative we call strategic rebalancing, which uses smart rebalancing timing based on trend-following signals – without a direct allocation to a trend-following strategy. For example, if the trend-following model suggests that stock markets are in a negative trend, rebalancing is delayed.

Keywords: Asset Allocation, Smart Rebalancing, Market Timing, Active Management, Buy and Hold, Overlays, 60–40 Portfolio, Balanced Portfolio, Stock-Bond Portfolio, Rebalancing, Drawdowns, Downside Loss, Skewness, Trend, Momentum, Derivatives, Futures, Behavioral Finance

JEL Classification: G10, G11, G12, G13, G15, G20, G22, G32

Suggested Citation

Rattray, Sandy and Granger, Nicolas and Harvey, Campbell R. and van Hemert, Otto, Strategic Rebalancing (December 19, 2019). Available at SSRN: https://ssrn.com/abstract=3330134 or http://dx.doi.org/10.2139/ssrn.3330134

Sandy Rattray

Man Group plc

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Nicolas Granger

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Otto Van Hemert

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

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