Threshold for Portfolio Rebalancing

These days, investment portfolios can be easily managed on an app. Investors can start investing in a portfolio from the comfort of their home, on their personal mobile screen. A well-diversified portfolio include equities, bonds, and other asset classes. Depending on risk appetite, each of these assets can be allocated and rebalanced appropriately in a portfolio to garner great potential returns!

What is Portfolio Rebalancing?

Rebalancing is the process of realigning the weightings of a portfolio of assets back to the recommended levels. It goes hand in hand with portfolio management and it involves periodically buying or selling assets in a portfolio to maintain an original level of asset allocation or risk. Over time, recommended portfolios experience drift or tracking errors, changing the original allocation of the recommended portfolio. It is important to ensure that your original allocations remain in order to safeguard against being overly exposed to undesirable risks and take advantage of opportunities to sell high and buy low (source).

When it comes to it, there are two main indicators of interest when maintaining a peak-performing portfolio- drift and tracking error.

What is Drift?

Portfolio drift is when natural market movements cause your investments to stray from your original or strategic asset allocation. For example, one asset class may have done extremely well, causing it to be overweighted in your portfolio. Drift is then calculated by the sum of one-sided difference between the customer’s portfolio and recommended portfolio, using the formula

What is Tracking Error?

Tracking error is the difference between the price behaviour of a portfolio and the price behaviour of its recommendation. It specifies how closely the first follows the second. The best measure is the standard deviation of the difference between the portfolio and its recommendation.

The tracking error formula is given by:

(Source)

This is often in the context of a hedge fund, mutual fund, or exchange-traded funds (ETFs) that did not work as effectively as intended, creating an unexpected profit or loss.

Portfolios are susceptible to drifts and tracking errors. In fact, drift will start on the following day after you buy a portfolio. As an investor, you’d want to be notified if there was significant change in your portfolio so that you can rebalance to keep to your asset allocation. It is a vital role of a fund manager, and in part a responsibility of the investor, to monitor their portfolios for drift and to understand when it is happening.

When Should You Rebalance?

What is the threshold of drift or tracking error that needs to be placed to ensure that portfolios are performing well? How do fund managers determine what a good drift threshold is, and when is it sensible that customers are alerted in that instance? Frequent alerts can cause fatigue and acting on every small drift incurs transaction costs.

The question on threshold was presented to us by a client, so our quant engineers used Geometric Brownian Motion (GBM) to model price movements and applied simulations to demonstrate drift behaviour. It allowed the team to have a rough idea about the shape of drift distribution and how detrimental it could be in extreme cases. In analysing tracking error, the team applied historical data backtests to produce a more accurate overview. Results show a general trend indicating that tracking error increases while drift rises, with several caveats and dependencies of each data set.

The truth is, there is no one-answer-fits-all. The answer depends on the portfolio, product, and experience of the Advisor managing the funds. The lower the threshold, more notifications will be sent. This can easily make investors frustrated, causing them to ignore these notifications, then put off rebalancing until it’s too late. On the other hand, when drift threshold is set too high, fewer notifications are sent but this could be detrimental to portfolio performance.

We have found the right balance through quantitative analysis. It is the key to an optimally performing portfolio.

Why Automation in Wealth Management Is Worth It

If you are looking for a digital wealth management solution that can address these issues, Quantifeed has the intellectual property and know-how to tackle this. The complex work of figuring all that out is done by our quant engineering team. Our Quant Services team then advises our clients to come up with the right threshold, allowing them to provide the best product and service to their customers. This keeps clients pleased with the way their portfolios are performing and managed.

This means Advisors need not manually manage notifications for their customers. The platform does it automatically, tremendously increasing efficiencies. Depending on the business requirement, QEngine can be automated to monitor and rebalance each customer portfolio timely and appropriately. We have configurable technology to help our clients come up with the right approach.

When we work with financial institutions to develop a compelling wealth management proposition, we configure QEngine to meet their business and technology requirements. A well-developed and holistic solution tailored to their needs can also be explored via QDiscovery, our design-led consultancy service.

Quantifeed has been making the complex simple for investors and financial institutions since 2013. Behind a great looking wealth management app is highly complex orchestration of algorithm, intelligence, and processes. QEngine has made the investing experience a delightful one for customers, seamlessly bringing together the complex back-end with the front-end.

Want to know more about Quantifeed’s Quant Services? Get in touch with us today or visit www.quantifeed.com to learn more.

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    Ross Milward

    Chief Technology Officer &
    Co-Founder

    Ross Milward leads Quantifeed’s technology and engineering efforts to deliver innovative digital wealth management solutions. Before co-founding Quantifeed, he spent more than 15 years in investment banking, holding senior positions in equity and equity derivatives technology.

    His expertise is in developing and managing large-scale enterprise-level global trading and risk systems. A former managing director, Ross has worked for Bank of America Merrill Lynch and Deutsche Bank. He has held multiple global and regional leadership roles, most recently as head of equities technology in Asia. He has worked in Hong Kong, Sydney and London.

    Ross holds a Bachelor’s degree in Computer Science with Honours and is a Fellow of the Securities Institute of Australia. He likes pushing his limits through long distance triathlon races.

    Michael McDonald

    Head of Web Engineering

    Michael McDonald builds Quantifeed’s online wealth management web application in order to deliver a user-friendly and integrated experience. Michael has over 11 years of experience in web application development.

    As Developer for Crossroads Hong Kong, he and his team set up the infrastructure for its donation and stock management application. As Developer at e-commerce company Synapse Connect in New Zealand, he and his team helped clients build mobile applications like prospersoftware.nz, providing him with a full-stack web development and DevOps skillset, servicing clients and back-office operations.

    Michael holds a Bachelor degree in Electrical and Computing Engineering from University of Canterbury New Zealand. He moved to Hong Kong in 2014 and enjoys the outdoors sports such as hiking and cycling.

    Joy Sun

    Head of Quantitative Engineering

    Joy steers Quantifeed’s research and development in systematic investment strategies, portfolio construction and trade execution. Prior to joining Quantifeed, she worked as a quantitative analyst in asset management and proprietary trading firms.

    She led development of trading strategies, including design,simulation and risk control, and research in market trend recognition and prediction. Joy earned her PhD in Operations Research from the University of Hong Kong, her MS in Statistics from Nan Kai University and her BS in Computational Mathematics from Dalian University of Technology.

    John Threlfall

    Head of Site Reliability Engineering

    John leads the SRE team in Singapore and is responsible for the overall infrastructure and SDLC of Quantifeed’s technology platform, QEngine. He ensures the design, availability, and reliability meets the requirements of both our internal and external users. He has over 20 years’ experience in the banking industry, with a demonstrated history in transforming back-office technology and developing reliable engineering systems for large financial institutions.

    Prior to joining Quantifeed, John held technical and leadership roles at Bank of America Merrill Lynch and Standard Chartered Bank. He holds a BSc degree in Artificial Intelligence from The University of Manchester in the United Kingdom. John moved to Singapore in 2008 and enjoys travelling with his family, football and scuba diving.

    Lars Bischoff

    Head of Core Engineering 

    Lars Bischoff is a lead senior software engineer on Quantifeed’s back-end services, with a focus on trading and external interfaces.

    Before joining Quantifeed, Lars had a number of leadership roles across major investment banks including Deutsche Bank, JP Morgan, UBS, and Citi. These roles included designing and implementing systems for Equities and Equity Derivatives Trading. Lars also held roles as country lead for Equities and Equity Derivatives Technology, as well as global lead for Equity Derivatives Trading.

    As a former Executive Director in Deutsche Bank and JP Morgan, Lars has extensive experience in building local and global development teams. In this capacity, he also defined and realised the technology direction and innovative platforms in the Equity and Equity Derivatives space for these two organisations. Lars holds a Bachelor of Science degree in Computer Science, from Macquarie University, Sydney.

    Chetan Shetty

    Head of Product Management

    Chetan leads Quantifeed’s product management capability and drives the implementation of features in our product that continuously solve digital wealth management problems for our clients.

    Chetan started his career as a software engineer in the aerospace industry working across the entire software development lifecycle. Subsequently he worked in various roles helping large enterprises in Hong Kong solve business problems with process and technology solutions. His experience ranges across aviation, insurance, public sector services and consulting. He has lived and worked across multiple countries and enjoys travelling to new places, tasting new cuisines and occasionally writing his blogs.

    Eric Lee

    Singapore Country Head & Head of Program Management

    Eric Lee leads the Singapore team in managing the delivery process to key regional clients such as DBS Singapore.

    Eric has held leadership roles throughout the capital markets technology domain in Morgan Stanley, Merrill Lynch, and Bank of America. He has worked extensively as the technology leader covering a broad set of functionality including  portfolio order management, equities, and electronic trading. Eric has worked around the world in locations such as Tokyo, London, New York City, and Hong Kong. He is currently based in Singapore.

    Eric has a Bachelor’s degree in Computer Science from the Columbia University School of Engineering and Applied Sciences.

    Conor Doyle

    Head of Pre-Sales

    Conor has over 20 years of experience of leading sales and service teams in high-growth financial software vendor organisations. His previous work experience focuses on leading multinational, cross-functional teams in the provision of leading-edge, highly complex and high-value fintech business solutions.

    Conor is an expert presenter, negotiator, and business operations manager; able to forge solid relationships with both clients and partners and build consensus across multiple organisational levels. He has demonstrated capacity for leadership and project management, with proven track record of meeting targets, overcoming challenges in real time, and delivering tangible results.

    Conor is bilingual (English and Japanese) with strong technical and integration experience and a Mechanical Engineering degree.

    Robert Rice

    Chief Sales Officer

    Robert Rice leads Quantifeed’s sales strategy and works with clients to define and deliver digital wealth management solutions. Based in Hong Kong for over 15 years, Robert has held sales leadership roles in APAC and EMEA at London Stock Exchange Group (formerly Refinitiv), Fitch Solutions, OFX and SNL Financial, leading teams servicing wealth managers, asset managers and financial institutions.

    His career is focused on brining innovative platforms, products and solutions to market helping clients meet their objectives. Robert is an appointed Mentor for the Hong Kong Fintech Week advising start-ups and market entrants on various topics and go to market initiatives.

    Audrey Wong

    Chief Operating Officer &
    Chief Financial Officer

    Audrey Wong manages operations and financial affairs to deliver on Quantifeed’s business strategy. Audrey joined Quantifeed from Bank of America Merrill Lynch, where she was COO for the equities division in Asia Pacific. Audrey’s tenure at Merrill Lynch included senior assignments in Toronto and New York, before relocating to Hong Kong in 2006 to take a new role as the Finance Head of Equities Derivatives for APR.

    Her responsibilities expanded to CFO of APAC Equities in 2011 and CFO for APAC Global Markets in 2013. Audrey holds a Bachelor of Business Administration from Brock University of Ontario. She is also a Chartered Professional Accountant of Ontario and Chartered Financial Analyst. Audrey enjoys biking and swimming with her two children.

    John Robson

    Chief Commercial Officer

    John Robson drives Quantifeed’s client partnerships. He works with financial institutions to assist them in developing their digital wealth management future. Based in Hong Kong for over 30 years, he has held regional leadership roles at JP Morgan, Nomura and Merrill Lynch managing teams which serviced the region’s consumer and private banks.

    His career has been focused on the development of investment platforms and products. He has been instrumental in introducing significant product innovation to wealth management platforms in Hong Kong, London and Tokyo.

    Alex Ypsilanti

    Chief Executive Officer &
    Co-Founder

    Alex Ypsilanti spearheads Quantifeed’s mission to solve the challenges of digital wealth management.

    Before co-founding Quantifeed, he spent fifteen years as an investment banking research analyst. His work enabled investors to improve their risk-adjusted returns and to gain access to a wider range of market strategies and risk premia. Alex, a top ranked analyst by Institutional Investor, had a leading role in the growth of the European ETF market, hedge fund replication and the use of volatility products in portfolios.

    A former managing director for Morgan Stanley and Bank of America Merrill Lynch, Alex has built and led teams of derivatives and quantitative strategists in London, Tokyo and Hong Kong.

    Alex holds Bachelors and Masters degrees in Information Systems Engineering and a PhD in Mathematical Finance from Imperial College, University of London.