As different assets generate different rates of
returns, a portfolio’s relative asset composition will deviate from the target weights over time.
In order to remain consistent with the institutional investor’s initially evaluated return and risk
preferences, the portfolio manager has to rebalance the assets back to their predefined target
weights. However, as rebalancing strategies imply selling a fraction of the better performing
assets and investing the proceeds in the worse performing, it is a highly challenging question
whether rebalancing strategies generate a value added for institutional investors and – if so –
what are the sources of this value added.