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Rebalancing (Threshold-Based)
Definition
Threshold-based rebalancing triggers a rebalancing trade when an asset class weight deviates from its target by more than a specified percentage (e.g., ±5% absolute or ±20% relative to the target weight). This approach balances the benefits of maintaining target exposures against the costs (transaction fees, tax realization, and operational burden) of continuous rebalancing. Wider bands reduce rebalancing frequency and costs but allow larger drift from policy targets; narrower bands maintain tighter adherence but increase turnover.
In the Context of Endowment Management
For endowment portfolios with significant illiquid asset exposure, rebalancing policy must account for the fact that private equity and real asset weightings cannot be adjusted quickly. Most endowments rebalance primarily through their liquid assets (public equity, fixed income) and through the pacing of new commitments to private funds. Rebalancing policy interacts with spending policy — during severe market declines, the need to raise cash for distributions may effectively force rebalancing regardless of formal policy bands.