Explain the effect of assets under management, holding size, trading liquidity and turnover on choices made in building equity portfolios
The idea
As assets under management grow, each position becomes a larger share of the stock's trading volume, so market impact rises and strategies that rely on small caps or frequent trading lose alpha. The manager can hold more names at smaller weights, which dilutes conviction, or trade over longer periods, which delays execution. Position limits are often set relative to average daily volume so that a holding can be exited within a set number of days. High-turnover strategies suffer most. The unifying idea is capacity: the asset level at which marginal trading costs wipe out expected alpha. The trap is judging a strategy on paper returns without scaling for impact; a responsible manager closes to new money before capacity is breached.
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