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The Journal of Portfolio Management

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Strategic Rebalancing

Sandy Rattray, Nick Granger, Campbell R. Harvey and Otto Van Hemert
The Journal of Portfolio Management Multi-Asset Special Issue 2020, jpm.2020.1.150; DOI: https://doi.org/10.3905/jpm.2020.1.150
Sandy Rattray
is the CIO of Man Group in London, UK
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Nick Granger
is a managing director of PIMCO
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Campbell R. Harvey
is a professor of finance at the Fuqua School of Business at Duke University in Durham, NC, and an advisor to Man Group
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Otto Van Hemert
is the head of macro research at Man AHL in London, UK
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Abstract

A mechanical rebalancing strategy, such as a monthly or quarterly reallocation toward 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. This article shows that the negative convexity induced by rebalancing can be substantially mitigated, taking the popular 60–40 stock–bond portfolio as the 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 is called 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.

TOPICS: Portfolio construction, wealth management, pension funds, foundations & endowments

Key Findings

  • • Many investors do not realize that calendar rebalancing of a portfolio is an active strategy that essentially buys losers and sells winners.

  • • Calendar rebalancing induces negative convexity in portfolios and heightens drawdowns.

  • • We explore popular solutions including partial rebalancing as well as less frequent calendar rebalancing. We also consider a direct allocation to trend strategies.

  • • We present a dynamic “strategic rebalancing” based on trend information; notably, rebalancing is delayed if stock markets are in a negative trend.

  • © 2020 Pageant Media Ltd
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The Journal of Portfolio Management: 47 (2)
The Journal of Portfolio Management
Vol. 47, Issue 2
Quantitative Special Issue 2021
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Strategic Rebalancing
Sandy Rattray, Nick Granger, Campbell R. Harvey, Otto Van Hemert
The Journal of Portfolio Management Mar 2020, jpm.2020.1.150; DOI: 10.3905/jpm.2020.1.150

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Strategic Rebalancing
Sandy Rattray, Nick Granger, Campbell R. Harvey, Otto Van Hemert
The Journal of Portfolio Management Mar 2020, jpm.2020.1.150; DOI: 10.3905/jpm.2020.1.150
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  • Article
    • Abstract
    • REBALANCED VERSUS BUY-AND-HOLD
    • ADDING A TREND STRATEGY ALLOCATION
    • STRATEGIC REBALANCING
    • STRATEGIC REBALANCING VERSUS A DIRECT ALLOCATION TO TREND
    • CONCLUDING REMARKS
    • ADDITIONAL READING
    • ACKNOWLEDGMENTS
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • ENDNOTES
    • REFERENCES
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