Selection of Negative Correlative Pairs to Build an Annual Rebalancing Portfolio

Portfolio management of mutual funds and exchange-traded funds is an essential issue for investors and managers. The task of portfolio management is asset allocation and maintenance over time. Modern portfolio theory (i.e., mean-variance analysis) is the mainstream method for asset allocation, and rebalancing is to maintain the allocation over time. Compared with mean-variance analysis, Hierarchical risk parity (HRP) is a stable and state-of-the-art method to build a portfolio. However, those methods did not take rebalancing into consideration. The mechanism of rebalancing maintains the portfolio by selling those securities that have gone up and buying those securities prices that have gone down. Rebalancing of negative corrective pairs of securities implies a buy-low and sellhigh strategy. Therefore, this research adopts HRP and combines annual rebalancing with negative correlative pairs of securities to maximize portfolio return. The results showed that the proposed method outperformed portfolios built by vanilla HRP and genetic algorithm.