Rebalancing methodology

In investment management, maintaining portfolio alignment with strategic goals is essential. Our rebalancing engine is designed to efficiently adjust client portfolios according to predefined allocation models. This guide details how the engine functions and explores the strategies it uses to achieve its objectives.

Allocation Settings

Users can customize models with various instruments, ensuring target allocations total 100%. Minimum and maximum settings trigger the engine's intervention, with these boundaries affecting the frequency of adjustments, driven by strategic requirements.

Setting allocation parameters, specifically minimum and maximum limits, is crucial in a model. During ad-hoc or scheduled rebalancing, the engine focuses on adjusting positions, including cash, that exceeds these predefined limits to ensure precision and efficiency.

Extreme boundary settings such as a 0% minimum or 100% maximum allocation is discouraged to avoid strategic pitfalls

Alignment with Precision and Efficiency

The rebalancing engine's primary role is to maintain alignment with target allocations. During rebalancing, it fine-tunes assets to bring them within the model's specified thresholds.

The engine efficiently manages diverse tradable instruments, such as stocks, ETFs, and mutual funds—whether traded in fractions, lot sizes, or amounts—and accounts for currency differences to adhere to account-specific allocation guidelines.

Designed to minimize unnecessary transactions, the rebalancing engine does not generate orders if all assets, including cash, are within their designated minimum and maximum allocation limits.

Customizable Scheduling

The engine offers flexible scheduling options: daily, weekly, monthly, and quarterly. Users can set ad-hoc rebalancing as the default option, allowing manual activation at any time via the platform.

Additionally, users can initiate ad-hoc rebalancing on models configured for scheduled automated rebalancing. On scheduled rebalancing days, the engine automatically adjusts positions that stray beyond defined limits, maintaining alignment without constant oversight.

While scheduled rebalancing ensure portfolio adherence to allocations, between scheduled rebalancing days, the engine deliberately avoids monitoring or adjusting positions to prevent unnecessary transactions and management overload.

Smart Adjustment Strategies

During rebalancing, the engine emphasizes impactful changes over nominal ones, prioritizing significant portfolio deviations and minimizing unnecessary transactions.

For instance, consider a portfolio with eight positions: seven equities slightly above target and one bond below its minimum. The engine selectively adjusts equity positions farthest from their targets, reducing transaction volume by focusing on significant misalignments rather than minor adjustments to positions nearly in line with their targets.

Efficient Execution

When client assets are eligible for same-day execution, the engine rapidly reinvests cash from sales to buy underweight positions, enabling complete portfolio adjustments within one day. This process minimizes time "out of the market," maintaining asset exposure and reducing missed opportunities.

For assets like mutual funds requiring longer execution cycles, sales occur first, followed by purchases over multiple days.

The engine coordinates buy orders immediately after sales, without waiting for settlements, ensuring responsive portfolio management and seamless transitions between asset adjustments.

Margins and Buffers

The rebalancing engine uses margins and buffers to ensure trades are successfully executed. The 'Trading Margin' ensures sell orders generate sufficient cash, and buy orders remain within available funds.

Market price fluctuations between rebalancing decisions and execution are mitigated by calculating buy orders at higher assumed prices (market price + trading margin) and sell orders at lower assumed prices (market price - trading margin). This precaution guards against adverse price movements impacting execution, allowing smooth portfolio adjustments.

The 'Trading Margin' is initially set to 2.5% for all partners. However, it can be adjusted on a case-by-case basis.

Precise Order Rounding

The engine rounds orders carefully—whether in integer, lot, or fractional units—to meet trading constraints and ensure proper execution.

For stocks requiring integer trade amounts, buy orders are rounded down and sell orders rounded up to the nearest integer. Instruments traded in specific lot sizes are similarly adjusted, while fractional trades like mutual funds have both buy and sell orders rounded to the nearest fraction, allowing precise rebalancing while adhering to trading standards.

While rounding, the rebalancing engine ensures sell orders never exceed the client's existing position size in the portfolio.