Suggestion for reducing transaction costs, potentially reducing number of transactions.
What is flow based rebalancing? - a new governance option for rebalancing.
Instead of periodic ‘hard’ rebalances that incur high gas and swap fees, I propose Flow-Based Rebalancing governance model as an alternative that DTF governance could choose. This mechanism uses activity (mints/redemptions) to adjust weights. Mints are routed to buy underweight assets; redemptions are fulfilled by selling overweight assets. This turns a rebalancing costs into a passive byproduct of fund growth
Say you have a DTF with 4 tokens. $25 each, for a DTF price of $100.
After some time, token A doubles, token B is cut in half and tokens C, D stay the same.
- now your DTF is worth $112.5 and has
- $50 for token A (44.4%)
- $12.5 for token B (11.1%)
- $25 for token C, D (22.2% + 22.2%)
The governance model is mandating that they DTF be rebalanced back to 25% each. Or a rebalance proposal could be submitted.
Instead of triggering buy and sell orders, this model would wait for dtf minting and redemption.
At this point a new mint comes in of $10.
Traditional Method: Buy $2.50 of all four tokens. Your DTF is now buying all the tokens at the current allocation. or even worse, buy the 4 with the current unbalanced weights.
Flow based rebalance will
- submit 1 buy order for $10 of token B.
- new composition will be $50 for token A. $22.5 for token B, $25 for tokens C,D.
- token A is now 40.8%, token B is 18.4%, token C, D are 20.4% each
Better alignment with the mandate allocation with 1 transaction only.
Now, there is a redeem of $10. Traditional Method: Sell $2.50 of all four tokens.
Flow based rebalance will submit 1 order, sell $10 of token A. And the DTF has
- $40 of token A, $22.5 of token B, $25 for tokens C,D
- 35.5% A, 20% token B, 22.2% for tokens C, D.
Better alignment with the mandate allocation with 1 transaction only.
Advantages:
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Lower Transaction Costs: It often involves fewer trades compared to selling and buying in a full rebalance, less slippage potential.
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“Buy Low, Sell High” Discipline: It forces the DTF to direct new money into the tokens that have underperformed (are “on sale”).
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Avoids Unnecessary Sales: keep riding the momentum of winning assets while still bringing the portfolio back into balance.
Limitations In very large portfolios or during massive market swings, new cash may not be enough to fix a major “drift” so it may take some time to get back t o the mandate allocation, but it will be continuously shooting for the mandate allocation.
