Capacity Analysis

We apply a range of methods for estimating capacity in a fund management context, and discuss the implications of the results. In addition to demonstrating how capacity analysis may be undertaken, we highlight the key determinants of estimated capacity. The central issue is the ability of a fund to access available alpha, and to do so before it erodes; and is often dictated by the size of funds under management at which holding or trading constraints impact. The magnitude of alpha and execution cost typically play a secondary role in determining capacity, although they matter for the potential level of net alpha. Other influential factors include: the horizon over which alpha accrues; the number of alpha-generating opportunities available; and the size segments from which alpha is sourced. We also find that the loss of ability to deploy further funds into alpha-generating opportunities is often reached before alpha is eroded to any threshold target in instances where constraints become binding. Thus effective capacity can be lower than implied under a threshold capacity definition