Evaluating fund capacity

issues and methods

Michael J. O'Neill, Geoffrey J. Warren

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We examine the issues and methods involved in evaluating the size that an equity fund might attain before it becomes unable to create additional value for investors. We discuss how capacity is defined, identify ten drivers and outline methods for conducting capacity analysis. We detail models that predict capacity, assuming that a fund adjusts the manner in which it trades and constructs portfolios as funds under management grow. We also provide an overview of transaction cost modelling, which is integral to predicting capacity. This study is primarily intended as an aid for investment industry participants who wish to evaluate the capacity associated with a given investment signal.

Original languageEnglish
Pages (from-to)773-800
Number of pages28
JournalAccounting and Finance
Volume59
Issue numberS1
Early online date7 Apr 2017
DOIs
Publication statusPublished - Apr 2019
Externally publishedYes

Keywords

  • Alpha
  • Capacity
  • Execution
  • Optimisation
  • Prediction

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