Rebalancing is a core concept in systematic portfolio management. When a portfolio drifts from its target allocation due to price changes, rebalancing restores the original weights by executing trades.
Types of Rebalancing
- Calendar-Based: Rebalance on a fixed schedule (daily, weekly, monthly, quarterly)
- Threshold-Based: Rebalance when a position deviates by more than a set percentage from its target weight
- Signal-Based: Rebalance when specific market conditions or signals are triggered
Frequency Trade-offs
| Frequency | Pros | Cons |
|---|---|---|
| Daily | Most responsive | Highest transaction costs |
| Weekly | Good balance | Moderate costs |
| Monthly | Common default | May miss fast-moving signals |
| Quarterly | Lowest costs | Significant drift possible |
In Algo Trading
Algorithmic strategies automate rebalancing completely. The system monitors positions, generates trade lists at each rebalance date, and executes orders. The portfolio always matches the strategy’s rules without manual intervention.