Rebalancing is a critical component of the ABC Demo Fund’s portfolio management strategy, ensuring alignment with the fund’s evolving risk profile and investment objectives. The rebalancing process is guided by a clear set of principles, primarily centered around the Risk-Reward ratio of assets and the fund’s life stage.

Rebalancing Trigger: Risk-Reward Ratio

Risk-Reward Analysis: Regular analysis of the Risk-Reward ratio for each asset in the portfolio is conducted. This ratio helps in assessing whether an asset remains aligned with the fund’s risk tolerance and return objectives.

Rebalancing Decisions: When the Risk-Reward ratio of an asset deviates significantly from the desired threshold, that asset is considered for rebalancing. This could mean either reducing or increasing its position in the portfolio, depending on whether the asset has become too risky or too conservative relative to its return potential.

Life Stage-Based Rebalancing

Early Stage (Years 1-3): Given the higher risk appetite in the initial years, rebalancing focuses on maintaining or increasing exposure to high-growth web3 assets while managing excessive volatility.

Mid-Term (Years 4-7): As the fund transitions to a more balanced growth-conservation approach, rebalancing involves shifting some gains from high-performing assets to more stable, yet promising, web3 investments.

Late Stage (Years 8-10): In the final years, rebalancing is increasingly geared towards capital preservation. Profits from high-growth assets are gradually moved into lower-risk, stable investments within the digital asset sphere.

Income Reallocation

Dynamic Allocation: Depending on the current stage of the fund, a portion of the income or capital gains may be reallocated to less volatile assets. This is particularly relevant in the later stages of the fund’s life cycle.

Stability Focus: As the fund nears its closing period, the emphasis on stability grows. Rebalancing ensures that the portfolio’s volatility is in line with the decreasing risk appetite, securing the gains made in the earlier high-growth phases.

Process and Frequency

Scheduled Reviews: The portfolio is reviewed at regular intervals (e.g., quarterly) to determine if rebalancing is necessary.

Ad Hoc Adjustments: In response to significant market movements or changes in asset Risk-Reward profiles, ad hoc rebalancing may be conducted.

Conclusion

The rebalancing strategy of the ABC Demo Fund is a disciplined, dynamic process, integral to achieving the fund’s long-term objectives. By regularly adjusting the portfolio in response to changing Risk-Reward ratios and aligning with the fund’s life stage, the fund maintains an optimal balance between growth, risk management, and capital preservation.