Abstract
Rebalance Timing Luck (RTL) refers to the performance dispersion that arises between otherwise identical strategies differing only in their rebalancing dates. Although often overlooked, RTL can reach substantial magnitudes in high-turnover strategies, and compounding effects may amplify its long-term impact. Portfolio tranching is a well-established method to mitigate RTL exposure, yet its real benefit is likely to depend on the investor’s assets under management (AUM). In this paper we empirically examine RTL in a U.S. equity momentum portfolio rebalanced monthly. Between 1991 and 2024, the gap in compound annual growth rate (CAGR) between the most and least favorable rebalancing schedules reached almost 350 basis points. We then develop a framework to determine the optimal degree of tranching under realistic assumptions about transaction costs. Results show that while tranching consistently reduces RTL, its net advantage is primarily confined to highly capitalized investors or those involved in the design of factor-based investment vehicles, whereas for smaller investors the additional trading costs often outweigh the benefits. Retail investors must therefore accept being exposed to RTL risk as an inherent and largely unavoidable aspect of rotation-based investing.
read the full paper from here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5747964