Daily Rebalancing is a portfolio management technique that systematically adjusts the asset weights within an investment portfolio to restore them to their predefined target allocations at a daily frequency. This practice ensures consistent adherence to the portfolio’s intended risk profile and investment strategy, particularly critical in volatile markets like cryptocurrency.
Mechanism
The operational system calculates the current deviation of each asset’s weight from its target based on daily market movements. It then generates precise buy or sell orders for specific crypto assets or other instruments to bring the portfolio back into alignment. This mechanism necessitates accurate valuation data, efficient order routing, and low-latency trade execution capabilities to minimize slippage and transaction costs, often managed by algorithmic trading infrastructure.
Methodology
The strategic principle behind daily rebalancing aims to mitigate risk drift and capitalize on mean reversion tendencies within asset prices, or to consistently harvest gains from outperforming assets by selling them to reallocate to underperforming ones. This systematic approach reduces discretionary decision-making, ensuring consistent application of the portfolio’s risk parameters and maintaining exposure to specific market factors, thereby optimizing long-term performance according to its design.
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