"Rebalance Timing Luck: The Dumb (Timing) Luck of Smart Beta" by Hoffstein, Faber and Braun

Two identical investment strategies. Same stocks. Same selection rules. Same everything. One outperforms the other by 40 percentage points in a single year. The only difference: when they rebalance. This disparity isn't random noise that washes out over time. It's permanent, it's large, and it reveals something uncomfortable about how investment performance gets measured and explained.

• A decision that seems trivial has outsized consequences. Shifting a rebalance date by just one month can create a 20-point performance gap over rolling years. For concentrated momentum portfolios on semi-annual schedules, timing luck alone can swing returns by more than 12 percentage points annually.
• This happens because portfolio holdings change constantly between rebalance dates. High-turnover strategies like momentum are particularly vulnerable. When you refresh holdings in May versus April, you're buying and selling different stocks at different prices, creating performance paths that diverge significantly.
• The gap doesn't shrink over time like you'd expect from random variance. Past research showed that a fundamental index rebalanced in March outperformed one rebalanced in September by over 10 points in 2009, and that performance difference never went away. The timing choice creates a permanent effect on wealth.
• Popular index funds are exposed to this problem and nobody really talks about it. S&P 500 Enhanced Value replications show annualized performance spreads of 100 basis points between best and worst rebalance schedules. Momentum indices are worse. These indexes are tracked by real money.
• This matters because it makes it nearly impossible to know whether a manager actually has skill or just got lucky with timing. When a fund beats its benchmark or peers, you can't tell if it's superior strategy or superior rebalance calendar. The measurement system itself is compromised.