Factor Construction: Portfolio Rebalancing

Weekly, Monthly, Quarterly?

February 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Factor portfolios do not benefit significantly from intra-month rebalancing
  • However, too infrequent rebalancing leads to lower risk-return ratios
  • The robustness of factor performance at different rebalancing periods is one of the advantages of factor investing


Creating factor portfolios requires investors to make a number of decisions regarding portfolio design and can be considered as much an art as science. The sorting metrics need to be defined, the stock universe, the top and bottom cut-off levels, and the rebalancing periods. The latter, i.e. how frequent the portfolio needs to be rebalanced, might seem trivial, but markets have gotten more efficient and quicker rebalancing might be advantageous. Academic research typically assumes quarterly or monthly portfolio rebalancing, which seems rather infrequent in the age of high-frequency trading. In this short research note we will analyse the impact of the rebalancing frequency on a multi-factor portfolio and four single factors (read: Factor Investing: Gross to Net Returns).


In this research report we focus on four factors namely Value, Size, Momentum and Quality. The factors are created by constructing long-short beta-neutral portfolios of the top and bottom 10% of stocks of the US stock market. The multi-factor portfolio is comprised of the four factors and is created via the intersectional model, which selects the stocks in the intersection of the factors. Only stocks with a market capitalisation of larger than $1 billion are included and each transaction occurs costs of 10 basis points.


The chart below shows the performance of a long-short multi-factor portfolio in the US, which ranks stocks for the Value, Size, Momentum and Quality factors. E.g. the long portfolio contains stocks that are cheap, small caps, have shown a good relative performance over the last 12 months and rank highly on quality metrics. The portfolio is rebalanced at different intervals and we can observe that the profiles are almost identical in terms of trend. However, the portfolios with more frequent rebalancing, i.e weekly to monthly, sho