Portfolio Management Processes: rebalancing index aware funds

When managing an index aware fund* one intellectual challenge is to know how often to rebalance the fund to the index and how to do this.

While working with a greenfield Fixed Income asset management client we established a multi-stage protocol for this process:

  1. Determine the investible universe
  2. Determine upper and lower bounds for exposure at multiple levels - a "compliant modelling" approach that took classic mandate restrictions AND investment preferences and combined them into one iterative process.
  3. Look at available market liquidity
  4. Generate multiple sets of order proposals
  5. Execute compliance restriction rules on the proposed orders in one iterative process. 
  6. Back test using some proprietary modelling techniques. 

What does this give you?

A production-line for portfolio construction and implementation.  With the iterative, computation intensive, data intensive processes performed by software, not trading desk assistants and portfolio analysts and assistant fund managers. 

*Index aware is the term that we use in this blog post to refer to a fund that has a specific benchmark index (either a single index or a composite) but which does not slavishly follow the index.

A different kind of production line, St. Athan, Wales...