The Capacity of Liquidity-Demanding Equity Strategies

摘要

We studied the dependence between an equity strategy's performance and its size using stock-specific market impact costs and alphas and demonstrated the benefits of using a bottom-up approach for calculating a fund's trading costs by linking contemporaneous market-impact costs and absolute returns. The evidence of an inverse relationship between the size of the fund and its net return due to rising market-impact costs is compelling. For instance, given a monthly IC of 5%, growing a theoretical active fund's assets from $5 billion to $20 billion decreases annual net return by 2% and decreases optimal monthly turnover from 50% to 34%. Similarly, keeping turnover at the optimal level allows the fund to grow to a larger AUM before the value-added of a corresponding strategy peaks. We demonstrated this by using the new concept of an efficient turnover frontier. A typical circumstance in which liquidity becomes particularly important is in changing the breadth of a portfolio or in portfolio transitioning. For example, efforts to increase assets while pursuing smaller tracking error could be frustrating, especially when suitable derivative products are not available.