Capacity Analysis for Equity Funds

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.