Rebalancing
Rebalancing is adjusting portfolio holdings to bring exposures back in line with target allocations or risk limits.
Allocator relevance: Maintains discipline—controls drift and ensures portfolios stay aligned with mandate, risk budget, and liquidity constraints.
Expanded Definition
As markets move and capital is called or distributed, portfolios drift away from targets. Rebalancing can be rule-based (thresholds, time-based) or discretionary. In portfolios with illiquid assets, rebalancing often happens primarily through pacing and new commitments rather than selling positions, which makes planning critical.
Rebalancing is a risk management tool, not just a performance tactic.
How It Works in Practice
Allocators monitor allocation bands, concentration limits, and factor exposures, then buy/sell or adjust commitment pacing to restore targets. Liquidity sleeves often fund rebalancing actions during volatility.
Decision Authority and Governance
Governance defines rebalancing triggers, who can execute, and how exceptions are handled. Clear rules reduce emotional decision-making in stressed markets.
Common Misconceptions
- Rebalancing is market timing.
- Rebalancing is only for public markets.
- Illiquid portfolios cannot rebalance (they rebalance via pacing).
Key Takeaways
- Rebalancing enforces allocation discipline.
- In private markets, pacing is the main rebalancing lever.
- Governance and rules prevent reactive mistakes.