It's no secret that pension plans are pinching pennies nowadays.
One tool that potentially can help them save on trading costs is a new quantitative rebalancing tool from New Frontier Advisors LLC, a financial software developer in Boston. New Frontier recently received a patent for its "Resampled Portfolio Rebalancing and Monitoring" software, the second such patent the firm has received in five years, said Richard Michaud, president and founder.
Most institutions create an optimal asset allocation and rebalance back to that asset mix on a quarterly or monthly basis. This approach, however, is flawed, said Mr. Michaud, because it fails to take into account two asset classes in an asset mix that might be closely correlated. New Frontier's new tool takes that into account, and therefore, lets institutional investors know when not to rebalance, said Mr. Michaud.
"It lets them know how to trade effectively," he said. "For example, if an investor allocates 20% each to large-cap and midcap stocks, and the investor finds that one went up 10% and the other went down 10%, they might be inclined to rebalance. But the two asset classes are so closely correlated that one could almost replace the other, so there wouldn't be a need to rebalance in that case."
In April 2000, New Frontier was awarded a patent for its Resampled Efficient Portfolio Optimization Process, a software program that calculates the average of hundreds of "efficient frontiers," and runs the data through a Monte Carlo simulation. The optimization strategy allows investors to incorporate fundamental factors into the optimization process.