Capacity Analysis for Equity Funds

This article discusses the definition and determinants of capacity, and outlines a practical approach for analyzing the capacity of equity funds. It is argued that capacity analysis should focus on ‘effective capacity' for the active component of a portfolio, defined as the assets under management where any additional investments would generate alpha below a minimum threshold at the margin. The approach combines potential drivers into an integrated analysis; and generates insight into the critical factors for the capacity of the strategy being analyzed. The approach is illustrated for a factor-based momentum strategy and an actual equity fund