January 3, 2024

Timing Luck in Factor Rebalancing

A look at how variations in individual factor turnover rates can introduce variance or luck into the performance outcomes of quant factor portfolios.

Timing Luck in Factor Rebalancing

When building quantitative factor portfolios there are a wide range of considerations involved from the research to the implementation phases.

This includes, for example, which factors to include, how they interact with each other, as well as practical considerations such as what kind of transaction costs are imposed by rebalancing the portfolio at varying frequencies.

Some of these considerations can also create very interesting impacts on strategy outcomes.

One case in point arises when the turnover of your factor signals is more frequent than the rebalance period of the aggregate factor portfolio.

The more frequent the factor signal turns over, the more sensitive it becomes to what is known as “rebalance timing luck.”

Rebalance timing luck is the phenomenon where a factor portfolio will exhibit large deviations in performance simply due to the dates upon which you arbitrarily decide to rebalance the portfolio.

Read the full article on AlphaLayer's Substack

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