Deviation-Based Rebalancing is an automated portfolio management strategy applied in crypto investing where asset allocations are adjusted back to target weights when they diverge by a pre-defined threshold. Its purpose is to control portfolio risk and capture relative value shifts.
Mechanism
The mechanism involves continuous monitoring of each crypto asset’s weight within a portfolio against its strategic target allocation. When an asset’s weight exceeds or falls below a specified percentage deviation, the system automatically triggers trades to sell over-allocated assets and buy under-allocated ones, restoring the desired balance.
Methodology
This methodology supports disciplined investment management by systematically enforcing portfolio constraints, preventing excessive concentration in outperforming assets, and providing a structured approach to asset allocation within volatile crypto markets. It optimizes long-term returns by mechanically “selling high” and “buying low” relative to target weights, reducing emotional biases in trading decisions.
Cross-asset correlation dictates rebalancing by signaling shifts in systemic risk, transforming the decision from a weight check to a risk architecture adjustment.
A deviation-based rebalancing strategy can outperform a calendar-based one by aligning transaction costs and risk control directly with market volatility.
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