The Tranching Dilemma. A Cost-Aware Approach to Mitigate Rebalance Timing Luck in Factor Portfolios
Rebalance Timing Luck (RTL) describes the performance differences that occur when identical investment strategies rebalance on different dates. Although often ignored, RTL can become significant—especially in high-turnover portfolios—where compounding magnifies long-term effects. Using a U.S. equity momentum strategy from 1991–2024, the difference between the best and worst rebalancing schedules reached nearly 350 basis points in annual returns. While portfolio tranching can reduce RTL, its net benefit depends on investor size: large and institutional investors may benefit, but for smaller investors, increased trading costs often outweigh the advantage. As a result, retail investors must generally accept RTL as an unavoidable part of rotation-based investing.