Rebalance Timing Luck : The Difference Between Hired and Fired

Prior research demonstrates that performance can be highly sensitive to index construction choices related to rebalance dates. The authors define the measure of “rebalance timing luck” as the standard deviation in returns between identically managed investment portfolios that are rebalanced on different dates (“sub-indexes”). Using a simple fixed-mix strategy, they identify that rebalance timing luck can have significant implications for realized results. Statistical tests imply that ex-ante expected returns for the sub-indexes are identical and realized performance differences are not expected to mean-revert over time. The authors demonstrate that investors can minimize the impact of rebalance timing luck through equal-weight exposure to the sub-indexes. They propose an ex-ante model to estimate the magnitude of rebalance timing luck and find that the process equally-weighting across N sub-indexes reduces rebalance timing luck by 1/N