Capacity and Factor Timing Effects in Active Portfolio Management

Conrad S. Ciccotello, Jason T. Greene, Leng Ling, David A. Rakowski
2010 Social Science Research Network  
Capacity constraints limit the profits of some investment strategies, while other strategies are more scalable. We develop a dollar-weighted return measure that parses the factor timing by investors and a strategy's capacity constraints. We find that actively managed funds exhibit significant capacity and timing effects, while index funds display only timing effects. A portfolio's liquidity, investment style, and distribution policy are important in explaining variation in capacity constraints.
more » ... pacity constraints. The analysis demonstrates that capacity and timing effects are important in analyzing portfolio manager skill and the cost of active investing.
doi:10.2139/ssrn.1516469 fatcat:tgbxuqjwdzbs3p557oxwgw34xq