Rebalance Timing Luck: The (Dumb) Luck of Smart Beta

22 Pages Posted: 30 Sep 2020

See all articles by Corey Hoffstein

Corey Hoffstein

Newfound Research

Nathan Faber

Newfound Research

Steven Braun

Newfound Research

Date Written: February 2020

Abstract

Prior research and empirical investment results have shown that portfolio construction choices related to rebalance schedules may have non-trivial impacts on realized performance. We construct long-only indices that provide exposures to popular U.S. equity factors (value, size, momentum, quality, and low volatility) and vary their rebalance schedules to isolate the effects of “rebalance timing luck.” Our constructed indices exhibit high levels of rebalance timing luck, often exceeding 100 basis points annualized, with total impact dependent upon the frequency of rebalancing, portfolio concentration, and the nature of the underlying strategy. As a case study, we replicate popular factor-based index funds and similarly find meaningful performance impacts due to rebalance timing luck. For example, a strategy replicating the S&P Enhanced Value index saw calendar year return differentials above 40% strictly due to the rebalance schedule implemented. Our results suggest substantial problems for analyzing any investment when the strategy, its peer group, or its benchmark is susceptible to performance impacts driven by the choice of rebalance schedule.

Keywords: Rebalancing, Calendar-Based Rebalancing, Partial Rebalancing, Portfolio Construction, Fixed-Mix Strategies, Staggered Rebalancing

JEL Classification: G11

Suggested Citation

Hoffstein, Corey and Faber, Nathan and Braun, Steven, Rebalance Timing Luck: The (Dumb) Luck of Smart Beta (February 2020). Available at SSRN: https://ssrn.com/abstract=3673910 or http://dx.doi.org/10.2139/ssrn.3673910

Corey Hoffstein (Contact Author)

Newfound Research ( email )

380 Washington Street
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HOME PAGE: http://www.thinknewfound.com

Nathan Faber

Newfound Research ( email )

425 Boylston Street
3rd Floor
Boston, MA 02116
United States

Steven Braun

Newfound Research ( email )

425 Boylston Street
3rd Floor
Boston, MA 02116
United States

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