On Book 5, Schweser notes, there’s a short paragraph discussing how rebalancing a commodity index would influence returns:
The frequency of rebalancing will also affect commodity index returns. Rebalancing portfolio weights will decrease returns when prices are trending but increase returns when price changes are choppy and mean-reverting. For this reason, price behavior across rebalancing periods will influence returns. If the prices of a commodity are choppy over short horizons but trending on a longer-term basis, frequent rebalancing may capture gains from mean reversion over the shorter periods but give up some of the gains from the trend of the commodity’s price over the longer term.
I don’t understand the underlined part. Why frequent rebalancing would capture gains from mean reversion but give up long term returns? Schweser gives no further explanation on this.
Thoughts please. Thanks!