Portfolio Rebalancing

Portfolio rebalancing is the allocator practice of adjusting exposures to keep the portfolio aligned with policy targets and risk limits as markets move. Drift happens automatically: public assets reprice quickly, private assets reprice slowly, and allocations can change materially without any intentional decision.

From an allocator perspective, rebalancing is not market timing. It is risk governance—especially when denominator effects cause private exposure to rise mechanically after public drawdowns.

How allocators define rebalancing risk drivers

Allocators evaluate:

• Target ranges: how wide bands are and what triggers action
• Rebalancing rules: time-based vs threshold-based
• Liquidity capacity: ability to act without breaking cash buffers
• Private market constraints: pacing and secondaries as rebalancing tools
• Governance: who can rebalance and what requires IC approval
• Discipline under stress: whether rules are followed when it’s uncomfortable
• Tax/transaction constraints: practical limits on action

Allocator framing:
“Does policy govern behavior—or does recent performance govern behavior?”

Where rebalancing matters most

• after drawdowns (denominator effects)
• after rallies that inflate equity risk unknowingly
• portfolios with high illiquid exposure and limited selling ability
• environments where correlations rise and concentration becomes visible

How rebalancing changes outcomes

Strong rebalancing:

• prevents unintended risk drift
• supports stable pacing and manager selection decisions
• reduces pro-cyclical behavior
• improves long-run consistency

Weak rebalancing:

• allows drift to become the strategy
• increases buy-high/sell-low tendencies
• triggers commitment freezes after stress
• creates governance distrust and reactive changes

How allocators evaluate rebalancing discipline

Conviction increases when allocators:

• define ranges and triggers clearly
• show evidence of acting against recent performance trends
• manage private drift through pacing/secondaries deliberately
• link rebalancing to risk budgeting and liquidity planning

What slows allocator decision-making

• no explicit ranges or triggers
• unclear authority to act
• inability to manage private exposure drift
• tax constraints discovered late

Common misconceptions

• “Rebalancing is market timing” → it’s risk governance.
• “Illiquids can’t be rebalanced” → pacing/secondaries are rebalancing tools.
• “We’ll rebalance when it feels right” → that’s drift, not discipline.

Key allocator questions during diligence

• What are the ranges and rebalancing triggers?
• Who has authority to act and on what cadence?
• How do you manage private drift (pacing, secondaries)?
• How do you avoid pro-cyclical behavior under stress?
• What constraints limit action (liquidity, tax, governance)?