quarter-end rebalancing, a worked example with made-up numbers

[Shadow Trader]

Quarter-end flows get talked about a lot and explained rarely. Here's a simple example, with invented figures.

Say an American fund holds 10 billion in European shares and keeps half of the currency exposure hedged. Over the quarter the shares rise 6 percent and the euro gains 3 percent against the dollar. In dollar terms the holding is now worth roughly 10.9 billion. The hedge was sized at 5 billion, so it now covers less than half.

To get back to 50 percent, the fund has to sell roughly another 450 million euros through forwards. That's the whole mechanism: winners grow, the hedge falls behind, and the fund tops it up. If European shares had fallen instead, the adjustment would go the other way.

Real funds follow their own rules. Some rebalance monthly, some quarterly, some only when drift passes a threshold, and plenty execute days earlier than the last day. Banks' research notes sometimes estimate the direction of these flows, with a wide margin of error.

A few hundred million is small next to a market that trades trillions a day. The effect shows up when many funds bunch their trades into the same few minutes, often around the 16:00 London fix. That's 16:00 GMT in winter or 17:00 WAT.

Have you noticed the final days of March, June, September and December behaving differently on your pairs, and in which direction?