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Rebalancing System Settings: Rebalance Settings

Contents

Introduction

Available Settings

Cash Rebalance Option

Default Sell Order

Default Buy Order

Improvement Percentage

Gross Up Existing Buys to Invest All Remaining Cash

Only Warn if Cash Reserves Cannot Be Met

Include Dividend Reinvestments for Wash Sale Restrictions

Use Relative Deviation/Use Absolute Deviation

 

Introduction

The Rebalance Settings allow you to customize how Tamarac Trading adheres to logic during a rebalance and how it calculates information during that process. These settings are widely applicable to many different rebalance types.

Available Settings

The following settings are available under the Rebalance Settings heading on the Rebalancing System Settings page.

Cash Rebalance Option

Choose one of the following:

Setting Option More Information
Use All Cash Excluding Model Target %

Tamarac Trading tracks cash for the overall group and prevents cash from being overspent, based on your model allocation. Once the cash target is reached, Tamarac Trading no longer makes any buy recommendations.

This setting is ignored for directed trades using the Rebalancing Group Value option.

Use All Cash

Tamarac Trading is not restricted to holding model cash and can invest all cash down to the minimum for cash within the model. This can occur if other positions can't be sold to generate cash to invest proceeds into underweight securities.

Default Sell Order

Choose one of the following: 

Setting Option More Information
Least to Greatest Realized Gains

Sell order is determined in this order: 

  1. Securities are sorted in order from least realized gain to greatest realized gain.

  2. Tamarac Trading then sells securities in that order, from least realized gain to greatest realized gain, until cash is raised.

For tax-deferred accounts, securities are sold from most to least overweight. Restricted securities are removed from consideration.

Most to Least Overweight Security

Sell order is determined in this order: 

  1. Securities with gains are sorted in order from most overweight to least overweight. Securities over their maximum are prioritized first.

  2. Tamarac Trading then sells securities in that order, from most overweight to least overweight, until cash is raised.

Restricted securities are removed from consideration.

Default Buy Order

Choose one of the following: 

Default Buy Order More Information
Most Underweight Security

This option prioritizes underweight securities when determining buy order. Buy order is determined in this order: 

  1. Any securities under their minimums are prioritized first, ordered by most underweight. Models aren't a factor, only securities are.

  2. Tamarac Trading finds and purchases the most underweight security that doesn't have restrictions.

  3. After each buy, this process is repeated until cash is depleted.
Most Underweight Security from Most Underweight Security Level Model

This option respects deviation in underweight Security Level models first when determining buy order. Buy order is determined in this order: 

  1. Models under their minimum within an underweight model are prioritized first, ordered by most underweight. Tiers aren't respected, only Security Level models are.

  2. Tamarac Trading finds and purchases the most underweight security in that Security Level model that doesn't have restrictions.

  3. After each buy, this process is repeated until cash is depleted.
Most Underweight Security from Most Underweight Model

This option respects deviation at higher-level tiers when determining buy order. Buy order is determined in this order:

  1. Models under their minimum within an underweight model are prioritized first, ordered by most underweight.

  2. Going from the top down, Tamarac Trading finds the most underweight tier. It orders the underweight models within that tier by most underweight until finding the most underweight Security Level model in that tier.

  3. Within that Security Level model, underweight securities are sorted by most underweight, and Tamarac Trading purchases the most underweight security that doesn't have restrictions.

  4. After each buy, this process is repeated until cash is depleted.
Highest to Lowest Rank from Underweight Model

This option respects ranks you've set for your models, regardless of whether those models use ranks or not. Buy order is determined in this order:

  1. Models under their minimum within an underweight model are prioritized first, ordered by most underweight.

  2. Going from the top down, Tamarac Trading finds the most underweight tier. It orders underweight models within that tier by rank until finding the highest ranked Security Level model that is also underweight.

  3. Within that Security Level model, underweight securities are sorted by rank and Tamarac Trading purchases the highest ranked underweight security that doesn't have restrictions.

  4. After each buy, this process is repeated until cash is depleted.

Improvement Percentage

Type any number from 0% to 100%.

How Improvement Percentage Works

Improvement Percentage gives you control over the trades recommended. Tamarac Trading will only recommend a trade if the overall improvement produced by that trade is equal to or better than the Improvement Percentage.

Tamarac Trading sets the default improvement percentage to 50%, meaning that the ending result of a trade must reduce the overall deviation from the security's target by 50% or better.The larger the improvement percentage, the more trades the system can recommend as there is a wider range to meet. A smaller improvement percentage becomes more restrictive and could recommend few trades as there is a more narrow range to meet.

Improvement Percentage Example

A client currently holds 3% of his account in MSFT. The target for MSFT is 5%, so MSFT is underweight. Improvement Percentage is set at 50%

During a rebalance, Tamarac Trading would ideally buy another 2% in MSFT to bring the security to its 5% target, but first needs to determine if a recommended buy would meet the requirement of the Improvement Percentage setting. Here's how this is determined: 

Initial Deviation of 2% ✕ Improvement Percentage of 50% =
Trade must be within 1% of the target of 5% for a trade to be recommended.

With this in mind, a buy for MSFT in this client's account must bring the final position to between 4% and 6% of the account to be recommended.

If you changed Improvement Percentage to 25%, here's how Tamarac Trading would determine if MSFT becomes a recommended trade: 

Initial Deviation of 2% ✕ Improvement Percentage of 25% =
Trade must be within 0.5% of the target of 5% for a trade to be recommended.

With this in mind, a buy for MSFT in this client's account must bring the final position to between 4.5% and 5.5% of the account to be recommended.

Gross Up Existing Buys to Invest All Remaining Cash

Note

In most cases, we recommend not using this feature.

Select or clear this option: 

Setting Option More Information
Selected Tamarac Trading buys up to model goals. If there is cash left over, it will put cash to work in already existing buys, potentially buying above model target. If there is a restriction on a security and you have cash remaining, Tamarac Trading will buy other securities instead of the restricted security.
Cleared Tamarac Trading only buys up to model goals. If there is cash left over, it will not be used to purchase securities already at their model targets.

Only Warn if Cash Reserves Cannot Be Met

Select or clear this option: 

Setting Option More Information
Selected Tamarac Trading only warns the user during a rebalance if cash reserves cannot be met.
Cleared Tamarac Trading prevents a rebalance if cash reserves cannot be met. This is the more restrictive option.

Include Dividend Reinvestments for Wash Sale Restrictions

Select or clear this option: 

Setting Option More Information
Selected Tamarac Trading will include dividend reinvestments in its lists of transactions to consider when determining which transactions would violate the wash sale rule.
Cleared Tamarac Trading will not include dividend reinvestments in its list of transactions to consider when determining which transactions would violate the wash sale rule.

Use Relative Deviation/Use Absolute Deviation

Choose one of the following: 

Setting Option More Information
Use relative deviation When calculating recommended trades, relative deviation calculates deviation relative to the parent model's target.
Use absolute deviation When calculating recommended trades, absolute deviation uses the absolute calculation of deviation.

 

Relative and Absolute Deviation Example

You have a Fixed Income model that's holding 45% and a Large Cap model that's holding 6%. The target for Fixed Income is 50% and the target for Large Cap is 10%, so both models are underweight.

The account has excess cash, so you perform a Buy Only to Invest Cash rebalance on the account:

Model Current Target Absolute Deviation Relative Deviation
Fixed Income 45% 50% 5% 10%
Large Cap 6% 10% 4% 40%