%0 Journal Article %A Walter Sun %A Ayres Fan %A Li-Wei Chen %A Tom Schouwenaars %A Marius A. Albota %T Optimal Rebalancing for Institutional Portfolios %D 2006 %R 10.3905/jpm.2006.611801 %J The Journal of Portfolio Management %P 33-43 %V 32 %N 2 %X Institutional fund managers generally rebalance using ad hoc methods such as calendar periods or tolerance band triggers. Another approach is to quantify the cost of a rebalancing strategy in terms of risk-adjusted returns net of transaction costs. An optimal rebalancing strategy that actively seeks to minimize that cost uses certainty-equivalents and the transaction costs associated with a policy to define a cost-to-go function. Stochastic programming is then used to minimize expected cost-to-go. Monte Carlo simulations demonstrate that the method outperforms traditional rebalancing strategies such as periodic and 5% tolerance rebalancing.TOPICS: Mutual funds/passive investing/indexing, quantitative methods, simulations %U https://jpm.pm-research.com/content/iijpormgmt/32/2/33.full.pdf