Rebalancing Diversifies, But Doesn’t Generate Better Returns

Rebalancing Diversifies, But Doesn’t Generate Better Returns

Rebalancing Diversifies, But Doesn't Generate Better Returns

A new study finds that, contrary to popular belief, rebalancing your portfolio will not generate returns greater than you would have earned otherwise. A rebalance of your Portfolio of course does however help to maintain a more diversified asset pool.

Diversification Returns, Rebalancing Returns and Volatility Pumping“:

It is widely claimed by both academics and practitioners that periodic rebalancing of portfolios to keep asset weights constant will directly boost geometric returns by buying on downticks and selling on upticks. This paper demonstrates that this is not the case by showing that comparable improvements arise even without rebalancing. This misattribution of returns has important implications for investors since, far from being beneficial, rebalancing is likely to be costly. Specifically, volatility pumping is a strategy which appears to benefit from high asset volatility and large rebalancing trades. We show that the real source of return on such strategies is an implied risk premium on these assets, and that volatility unambiguously reduces expected terminal wealth.

This Top Value Hedge Fund Is Killing It This Year So Far

Stone House Capital PartnersStone House Capital Partners returned 4.1% for September, bringing its year-to-date return to 72% net. The S&P 500 is up 14.3% for the first nine months of the year. Q3 2021 hedge fund letters, conferences and more Stone House follows a value-based, long-long term and concentrated investment approach focusing on companies rather than the market Read More

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