rebalancing

• Rebalancing

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Balance of payments - Rules based rebalancing mechanisms

1 . John Maynard Keynes, one of the architects of the Bretton Woods

system had wanted additional rules to encourage surplus countries to

share the burden of rebalancing, as he argued that they were in a

stronger position to do so and as he regarded their surpluses as negative Externality|externalities imposed on

the global economy.https://store.theartofservice.com/the-rebalancing-toolkit.html

Balance of payments - Rules based rebalancing mechanisms

1 In 2008 and 2009, American economist Paul Davidson

(economist)|Paul Davidson had been promoting his revamped form of

Keynes's plan as a possible solution to global imbalances which in his opinion would expand growth all

round without the downside risk of other rebalancing methods


NASDAQ-100 - Yearly rebalancing and re-ranking

1 All changes, regardless of when they occur, are publicly announced via press

releases at least five business days before the change is scheduled to take

place. The 2012 results of the re-ranking and rebalancing will be announced on

December 14 with the changes effective the morning of December 24, coinciding

with the expiration of options on December 21.


Low latency trading - Trading ahead of index fund rebalancing

1 This allows algorithmic 'numerology' (80% of the trades of whom involve

the top 20% most popular securities) to anticipate and trade ahead of

Market impact|stock price movements caused by mutual fund

rebalancing, making a profit on advance knowledge of the large

institutional block orders


Algorithmic trading - Trading ahead of index fund rebalancing

1 This allows algorithmic traders (80% of the trades of whom involve the top

20% most popular securities) to anticipate and trade ahead of Market

impact|stock price movements caused by mutual fund rebalancing,

making a profit on advance knowledge of the large institutional

block orders


High-frequency trading - Trading ahead of index fund rebalancing

1 This allows trading algorithms to anticipate and trade ahead of Market

impact|stock price movements caused by mutual fund rebalancing,

making a profit on advance knowledge of the large institutional

block orders


Rebalancing investments

1 The 'rebalancing of investments' is the action of bringing a portfolio that has deviated away from one's target asset allocation back

into line. This can be implemented by transferring assets, that is, selling investments of an asset class that is overweight and using

the money to buy investments in a class that is underweight, but it also applies to adding or

removing money from a portfolio, that is, putting new money into an underweight class,

or making withdrawals from an overweight class.


Rebalancing investments - Rebalancing to control risk

1 The goal of rebalancing is to move the current asset allocation back in line to the

originally planned asset allocation (i.e., their preferred level of risk exposure). This rebalancing strategy is specifically known as a Constant-Mix Strategy and is one of

the four main dynamic strategies for asset allocation. The other three strategies are 1) Buy-and-Hold, 2) Constant-Proportion and 3) Option-Based Portfolio Insurance.


Rebalancing investments - Rebalancing bonus

1 The promise of higher returns from rebalancing to a static asset

allocation was introduced by William Bernstein in 1996. It has since been

shown to only exist under certain situations that investors are not able

to predict. At other times rebalancing can reduce returns.

Most agree that:



1 * A potential rebalancing bonus is determined by two assets' relative

variances and covariance. These metrics are developed by averaging historical

returns, which are no guarantee of future results in the short term or long term. E.g. debt is traditionally thought to be negatively correlated to equities, but

during the 'Great Moderation' they were positively correlated.



1 * The bonus is greater when each asset's price swings widely, so that each rebalancing creates an entry point at a very low cost relative to

the trend. But that is not to say price volatility is a desirable attribute of

any asset.



1 * The bonus is greater when the prices of both assets are increasing at roughly the same trend rate of

return. If one asset's growth is much lower, each rebalancing would push money from the winning asset into the losing (or lesser return) asset.



1 * The bonus is greater when returns are negatively correlated and revert to their mean on the same cycle as

the rebalancing takes place.



1 The Constant-Mix rebalancing strategy will outperform all other

strategies in oscillating markets. The Buy-and-Hold rebalancing strategy

will outperform in up-trending markets.


Rebalancing investments - Rebalancing strategies

1 Some say that the exact choice is probably not too important, as long

as the rebalancing is performed consistently. Some say otherwise,

such as:


Rebalancing investments - Rebalancing strategies

1 * Rebalancing when current allocation is 5% off from target asset allocation:


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