Opportunistic rebalancing is a strategy that proposes to look frequently and rebalance only when you need to. Compared with traditional annual or quarterly rebalancing, it increases return benefits by capturing sporadic buy-low/sell-high opportunities while controlling risks. Look frequently and trade less to maximize your rebalance benefits.

This strategy proposes a new paradigm for wealth managers-to rebalance less frequently, but to look more frequently to find the best opportunities for rebalancing, different from the traditional way of rebalancing quarterly or annually.

Opportunistic Rebalancing not only controls portfolio drift, but also provides significant return improvements by capturing buy-low/sell-high opportunities as asset classes sporadically drift relative to each other.

A study of wide range of market conditions shows that opportunistic rebalancing benefits can be more than doubled compared with the traditional annual rebalancing. These additional benefits, attributed to transient momentum and mean reversion effets, occur sporadically in time and can only be captured by monitoring portfolios frequently.

This strategy proposes that:

• Use wider rebalance bands

This strategy includes a new parameter-the “tolerance band”. It’s defined so that all the asset classes are within the tolerance band. It proposes to set a 20 percent tolerance band, instead of narrower bands such as 0, 5, 10 or 15 percent, as study shows that benefits increase as bands are widened, up to 20 or 25 percent. Too narrow a band curtails rebalancing benefits because it does not allow classes to ride the up or down trends, while too wide a band misses buy/sell opportunities.

• Evaluate client portfolios biweekly
  

The study shows return benefits for the wider 20 percent increases with the frequency of looking, up to biweekly looking.

• Only rebalance asset classes that are out of balance—not classes that are in balance
  

Under this strategy, we only correct asset classes which are out of the tolerance band. This will greatly reduce the number of trades.

• Increase the number of uncorrelated classes used in portfolios
  

Rebalancing benefits can be increased by using more uncorrelated asset classes, to increase the number of buy-low/sell-high opportunities. In contrast, the move to lump a number of equity classes into a core holding is contrary to the study.

Performance and risks

We have three model portfolios. The  rebalancing band for all of them is 20%.

• The first portfolio invests in multiple assets and is rebalanced monthly. From 07/21/2002 to 08/05/2009, it achieves a Sharpe ratio of 0.351 and a standard deviation of 0.133.
• The second one is rebalanced biweekly and initiated on a Gibson Asset Allocation portfolio. From 12/31/1997 to 08/05/2009, the Sharpe ratio is 0.185 and a standard deviation of 0.146.
• The last one is also rebalanced biweekly and initiated on an Andrew Tobias portfolio. From 07/17/2000 to 08/05/2009, the Sharpe ratio and the standard deviation are 0.07 and 0.137 respectively.

• William Bernstein's 4 funds with opportunitistic rebalancing

See Also

• Gobind Daryanani. Opportunistic Rebalancing: A New Paradigm for Wealth Managers. 2008 January.