The Problem of Rebalancing Using Optimization Techniques
Research Paper
October 17, 2022
Preview
This paper originally appeared on Fabricrisk.com. MSCI purchased Fabric — now known as MSCI Fabric — in December 2023.
Mean-variance optimization is a blunt instrument that is difficult to customize for a heterogeneous set of clients. Advisers need more malleable and flexible tools that can respect the realities of the market and the objectives of their clients. Modern technology allows advisers to move away from machine-driven optimization to what we call guided rebalancing.
One way a mechanistic optimization engine can be rejiggered is to think in the context of risk factors rather than assets. Rebalancing to the underlying assets' risk contributions allows for smaller changes to a portfolio than a traditional optimization based on asset-class allocations.
Risk decomposition following MSCI factors
The analysis uses the MSCI Multi-Asset Class Factor Model MAC Tier 4.
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