In the article, the daily rebalanced strategy returned more than the monthly rebalanced strategy. That's not strange, its expected. Equities do the same thing. More frequent rebalancing leads to higher returns.
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Right so there is a natural path you would expect with no action. So the rebalance premium is return above what the natural return would be.
Yeah robot has this right imo. Rebalancing is table stakes, that should be your benchmark (and in many professionally managed portfolios it literally is). Not rebalancing back to target weights is negative alpha.
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I agree there is a difference between rebalancing and not rebalancing, and over the long term not rebalancing is worse. But you’re not “earning a premium” you are “avoiding a penalty” (the penalty for being underdiversified). Maybe it’s just semantics.
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In certain contexts rebalancing induces negative convexity but the whole discussion has a distinction-without-a-difference flavour.
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Agreed, it's not alpha, but it is a source of return for portfolios that benefit from it vs. other portfolios that don't.
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Yeah. I think this is important. Lots of people look at the historic returns of daily rebalanced stock portfolios, for example, and attribute the excess returns to some magickal voodoo effect - rather than the historically observed negative auto-correlation in stock returns.
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At what rebalancing frequency are the the table stakes set at?
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Depends on how rapidly the target weights change and how volatile the assets traded are. As a general rule, evaluate deviation from target wts at least once/day and rebalance if the deviation is large enough (after taking tcosts into account)
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