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 — ensuring the portfolio always matches the strategy’s rules without manual intervention.