Evaluating Fund Capacity: Issues and Methods

45 Pages Posted: 28 Sep 2016  

Michael J. O'Neill

Bond University - Bond Business School

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics; Centre for International Finance and Regulation (CIFR)

Date Written: September 27, 2016

Abstract

We examine the issues and methods involved in evaluating the size that a 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. Models that predict capacity assuming a fund adjusts the manner in which it trades or constructs portfolios as funds under management increase are detailed. We also provide an overview of transaction cost modeling, which is integral to predicting capacity. Implications for fund managers, as well as asset owners and other fund investors, are highlighted. This report is primarily written as an aid for investment industry participants who wish to evaluate the capacity associated with a given investment signal.

Suggested Citation

O'Neill, Michael J. and Warren, Geoff, Evaluating Fund Capacity: Issues and Methods (September 27, 2016). CIFR Paper No. 124/2016. Available at SSRN: https://ssrn.com/abstract=2844532 or http://dx.doi.org/10.2139/ssrn.2844532

Michael J. O'Neill

Bond University - Bond Business School ( email )

Gold Coast
Australia

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

HOME PAGE: http://www.cifr.edu.au/

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