Index rebalancing explained

What is rebalancing?

Rebalancing refers to the process of adjusting the asset allocation within an investment portfolio. This is done to maintain the desired level of risk and return over time. As market conditions of different strategies and assets fluctuate, the original strategy allocation may deviate from the intended proportions.

Why is rebalancing necessary?

Needless to say, the Defi space is changing so fast that many ordinary consumers simply do not have time to keep track of all projects, and important data in real-time so that they can react in time to avoid potential risks.

Sometimes you can invest in a project that has a juicy APY and then a few weeks or months later the APY, TVL, or other parameters can change significantly while you didn't suspect a thing.

Therefore, experienced investors in Defi are accustomed to carrying out daily checks on their own, keeping up to date with all changes, which is very time-consuming and can be compared with a full-time job, not everyone can afford it.

How is rebalancing used in Locus?

Each Locus index is not just a set of prepared strategies with a balanced risk and reward profile, the indexes are also built to ensure that over time they remain within a given range of profitability and safety.

With this problem in mind, the Locus team has developed indexes that mitigate the need for customers to do so through regular, automated tracking of key metrics for projects being used in the index. An advanced alerting system allows indexes to adjust the balance between risk and reward.

Read more about what metrics are used to rebalance strategies within an index here Strategies allocation scoring explained