A Practical Approach for Analyzing Fund Capacity
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How large can a fund grow before operational and implementational inefficiencies become too significant and the fund’s investment style and performance outcomes can no longer be maintained?
MSCI previously proposed an approach for analyzing the capacity of factor-index strategies based on index-level factor exposures and a set of liquidity and ownership, which does not require making direct assumptions about the expected return of a strategy.
In our latest study, we follow the above approach and propose a practical framework to analyze capacity of active funds based on selected measures. We take actual position data of sample funds as examples and showcase how capacity can be estimated, considering factors that differentiate active investing from index investing, by running three studies.
For example, if the focus of the manager of any of our hypothetical funds was based on responding to slower and less volatile signals such as industry trends, then they may be able to sell out of asset positions on a much longer horizon and gradually invest in new positions. Applying our approach we were able to determine that all three funds would allow for such a strategy, as their illiquid holdings (positions that take longer than 20 business days to sell) make up a relatively small percentage (<30%).
Data as of Dec. 31, 2024.
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