Rebalancing an investment portfolio means changing one or more holdings, so the portfolio re-aligns with a target portfolio. A portfolio can become misaligned for many reasons, for example:
An automatic rebalancing application calculates all adjustments needed to bring a portfolio back in line with its target without human intervention.
The best portfolio rebalancing software shall be able to cater for any rebalancing strategy. Below are the 5 most common:
The video below shows how to rebalance 1 fund and 3 mandates at once using Limina:
When considering automation of portfolio rebalancing, you can look to take two approaches:
1. Minimise the time a human spends on the process
2. Try to remove the human from the process altogether
At Limina, we believe 2 isn’t yet feasible. You still need a human to decide how to handle situations that have never appeared before, which can be anything related to holdings, cash, current portfolios or future projections.
At Limina, we measure the time users spend in the system. On average, portfolio managers spend 15 minutes daily in our system, and we’re obsessed with reducing this further! Reach out to understand how.
AI doesn’t yet have “common sense”, making it an inferior tool for automating investment workflows (a precise craft). Instead, we look to AI for pattern recognition and suggestions. For example, “Did you forget to put the FX trade in?” instead of trying to ask AI to generate the trade.
Your portfolio rebalancing system should ideally not take portfolio and cash views from an accounting system and adjust them. Instead, it should instantly build portfolio views (positions & cash) from underlying transactions and simulated orders.
The reason is that adjusting accounting holdings won’t give you all the details you need. The accounting view can’t show future cash flows such as coupons, dividends or commissions. If a settlement fails, it’s unclear whether that has been included in the view you’re seeing. The list goes on.
Here's one of the ways Limina can display future portfolios:
Some asset classes behave differently from others when rebalancing, not just the difference between exposure and duration-driven instruments (discussed above).
Look-through means seeing the constituents of the fund or index derivative. For fund-of-funds and index derivatives, you can’t rebalance to, e.g. a sector or industry, without look-through. The portfolio rebalancing software will break your position down into its underlying parts for calculation, and you will be able to aggregate the sector exposures of a fund.
You might be restricted from selling a particular holding for any reason, so the best portfolio rebalancing and trade management software must factor that in. It’s great if the automatic calculations consider the restriction so you don’t waste valuable time making manual adjustments.
Other limitations might include duration targets or even fund restrictions. These might be calculated by investment compliance software, but their results shall be incorporated into the rebalancing. Within Limina, these are modules within the same platform.
There are several scenarios when you might want to rebalance multiple portfolios at once, for example:
There are two ways for fund rebalancing tools to solve these:
1. From the view of the model.
You select the model and rebalance all portfolios that subscribe to it simultaneously.
2. From the view of the target portfolio.
You select the portfolios you want to rebalance and rebalance all models to each.
Neither of these approaches are reasonable solutions since you can’t see or adjust details on a portfolio level for multiple portfolios simultaneously. A concrete example: you might want to check that all cash accounts have positive cash over the coming week (not just the total).
The best portfolio rebalancing system gives you the view from multiple portfolios simultaneously, with minimal clicks.