Dynamic Asset Allocation and Portfolio Rebalancing

Rebalancing, Risk Parity, and Dynamic Allocations

There are a number of reasons why asset allocators might dynamically adjust the asset mix within a portfolio. The simplest reason is that weightings have become out of line with their target allocations, which can be rectified with periodic rebalancing.  Other allocators will deploy shorter-term tactical adjustments, taking a view on near-term asset price movements. Another category of dynamic asset allocation strategies will adjust the balance between "safe" and "risky" assets, in response to market movements, in order to control downside risk.   

The bulk of the papers listed below present dynamic approaches to asset allocation within portfolios, while some discuss the closely related concepts of portfolio rebalancing and risk parity. 

Friend or Foe? Volatility as a rebalancing signal (Intech, Jan 2019)

For compliance reasons, this paper is only accessible in certain geographies

Volatility is usually seen as something bad, a foe to long-term performance; but the insights it provides may actually make it more of a friend that can be used to help strengthen portfolio resilience.

Friend or Foe? Volatility as a rebalancing signal (Intech, Jan 2019)

For compliance reasons, this paper is only accessible in certain geographies

Volatility is usually seen as something bad, a foe to long-term performance; but the insights it provides may actually make it more of a friend that can be used to help strengthen portfolio resilience.

A Dynamic Approach For A Changing World (Manulife, Mar 2018)

For compliance reasons, this paper is only accessible in certain geographies

Manulife describes a dynamic fixed income approach that focuses upon combating volatility by steering clear of corporate bonds and focusing on highly liquid assets in combination with active risk management.

Dynamic Asset Allocation Through the Business Cycle (Oppenheimer, 2015)

The authors present a dynamic approach to asset allocation that anticipates changes in a macro regime and allocates accordingly, based upon regime-specific changes in asset risk premia.

Step Optimization and Portfolio Design (Jacobi, 2018)

Visualizing changes in portfolio allocations and adopting a stepwise approach to portfolio optimization may provide advantages over a traditional portfolio optimization process.

Some Like It Hedged (CFA Institute Research Foundation, 2018)

Should institutional investors hedge their currency exposures? A dynamic approach to downside risk mitigation might suggest so. CFA Institute Research Foundation covers all relevant aspects of the currency hedging decision in this paper.

A Tactical Asset Allocation Workflow (Axioma, 2018)

Axioma explains the relationship between strategic asset allocations and active tactical overlays attempting to either mitigate risk or add alpha in this workflow.

Understanding the Diversity of Options Strategies (Swan Global, 2018)

Options strategies are frequently used to protect against downside risk. This primer on options from Swan Global aims to demystify options strategies, synthetics, and other derivatives for institutional investors.

Multi-Asset Credit: How a Dynamic Strategy Can Provide Return – and Safety – in Uncertain Times (PineBridge, 2018)

PineBridge discusses multi-asset credit as an alternative fixed income approach which casts out a wider net, while managing risk and focusing on security selection.

PORTFOLIO REBALANCING

Rebalance or Rush Hour? (Research Affiliates, Aug 2018)

Research Affiliates describes how to approach the rebalancing of portfolios in a systematic fashion, thereby improving risk-adjusted returns.

Rebalancing: why investors need to keep their balance (Schroders, Jul 2018)

Shroders argues that an active rebalancing policy is essential to achieving and retaining healthy long-term returns. They also discuss rebalancing-related decisions on frequency, allocations, and implementation.

Portfolio rebalancing: The Hidden Factor Exposure (Frontier Advisors)

The author, Daniel Selioutine, observes that regular, passive rebalancing of a portfolio (following a static benchmark allocation) generates an unintended negative exposure to the momentum factor. This eight page report examines the implications.

The Unexpected Costs of Rebalancing and How to Address Them (2014)

In this paper, the authors explore some surprising properties of rebalancing and show how a momentum overlay can improve risk and drawdown properties without reducing expected returns in a constant-mix portfolio.

RISK PARITY STRATEGIES

Risk Parity (Meketa, 2018)

This paper covers risk parity in the context of an asset allocation strategy for institutional investors. Risk parity is an asset allocation strategy that, as its name entails, aims to allocate risk equally among assets in a portfolio.

Indexing Risk Parity Strategies (S&P Dow Jones Indices, 2018)

See how the S&P Risk Parity Indices use futures to represent multiple asset classes and attempt to reflect the risk/return characteristics of funds offered in the risk parity space.

Stress-Testing Risk-Parity Strategies (MSCI blog, 2018)

MSCI used stress tests to explore the vulnerabilities of volatility-targeting and risk-parity strategies to sharp increases in inflation.

An Asset Allocation Primer: Connecting Markowitz, Kelly and Risk Parity (PIMCO, Oct 2017)

This article describes and contrasts the mechanics of standard asset allocation models, including the utility based, Markowitz, Kelly, risky parity and fixed allocation approaches.

A Performance Analysis of Risk Parity (Lazard, 2016)

Lazard Asset Management asks whether risk parity allocations can outperform a buy-and-hold, asset based, equal-weighted allocation. They also seek to identify the return sources of risk parity portfolios.