The Autopilot Trading Engine is designed to optimize trading for efficiency and simplicity. By utilizing dynamic tolerance configurations, optimization algorithms, and the industry’s only Risk Number Rebalancer, Autopilot minimizes the amount of manual work needed to keep accounts on target.
In This Article
- Trade tolerance bands
- Risk number rebalancing
Trade Tolerance Bands
Autopilot uses preprogrammed trade tolerance bands to determine how many shares to buy and sell. After you have selected a model to target, Autopilot uses the following rules to generate trades:
- Excluding locked allocations, Autopilot will sell any holdings found in the current account that are not found in the target model.
- Autopilot will then aim to buy/sell holdings in order to get as close to target as possible while being careful not to generate unnecessary trades. Autopilot’s optimization algorithm accomplishes this with dynamic trade tolerance bands. Relative tolerances start at +/-10% of the allocation with an upper limit of 4%.
- There is no lower limit for very small securities but Autopilot does enforce a minimum upper tolerance of 0.5%. For example, an allocation that makes up 2% of a model will have a range of 1.8% ~ 2.5% and an allocation that makes up 1% of the model will have a range of 0.9% ~ 1.5%. The graphic below illustrates the relative tolerance with a few examples.
Risk Number Rebalancing
Autopilot analyzes all Autopilot enabled accounts every night for Risk Number drift. If an account moves more than six Risk Numbers away from the model being targeted, it will appear in the To Process tab with the recommended trades needed in order to return the account to its original Risk Number.
In theory, advisors often select a rebalancing strategy by weighing their willingness to assume risk against expected returns net of the cost of rebalancing. While there are many competing theories around the optimal threshold and frequency of rebalancing, backtesting will show the risk-adjusted returns are not meaningfully different whether a portfolio is rebalanced monthly, quarterly, or annually. Rebalancing is extremely important because it helps investors maintain their target risk exposure. With Risk Number Rebalancing, advisors can diminish the tendency for portfolio drift, and thus potentially reduce their client's exposure to risk relative to their target asset allocation.
Risk Number Drift is synonymous with the change in an accounts volatility. For example, a 60/40 account of stocks and bonds will drift as certain asset classes outperform others. As this drift happens, the accounts Risk Number will change, but drift in one or two Risk Numbers may be tolerable, as the cost of rebalancing will negate the benefits. Too much drift however, and the client is now exposed to a higher downside potential than they may be comfortable with. A 60/40 stocks to bonds account that drifts to 70/30, corresponds to approximately a 10% increase in volatility -- a seven Risk Number increase. By recommending an account be rebalanced when the Risk Number drifts more than six numbers up or down, advisors can avoid excess trading, and act in their client's best interest by returning the account to the agreed upon risk premium.