What is implementation shortfall and why is it important?
Implementation shortfall compares execution prices against prices prevailing at the time the portfolio manager decides to trade. Any difference represents the cost to a fund of achieving its desired exposure, whether caused by delay in decision making, delay in trading or the impact of completing large orders in less liquid securities. In aggregate it represents the direct loss of investment “alpha” (i.e. return) caused by the act of completing the trade. Implementation shortfall is important because it shows how much the complete cost of trading. As such it is a useful guide of the extent to which an investment “idea” had to outperform in order simply to “break even”. This can affect how portfolio managers evaluate their activity. However, implementation shortfall does not take any account of the practicality of trading in any specific market. It is an idealized number rather than a realistic one. It is therefore essential when considering implementation shortfall to disaggregate the
