Capacity Analysis for Equity Funds

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This article discusses the definition and determinants of capacity, and outlines methods of capacity analysis. It is argued that analysis should focus on ‘effective capacity’ for the active component of a portfolio, defined as the asset under management where any additional investments would generate insufficient alpha at the margin. A practical approach is presented that combines potential drivers into an integrated analysis; and its application generates insight into the critical factors for the capacity of the strategy being analyzed. The approach is illustrated for a factor-base momentum strategy and an actual equity fund.