TY - JOUR T1 - The Impact of Constraints on Value-Added JF - The Journal of Portfolio Management SP - 45 LP - 54 DO - 10.3905/jpm.2007.690605 VL - 33 IS - 4 AU - Bernd Scherer AU - Xiaodong Xu Y1 - 2007/07/31 UR - https://pm-research.com/content/33/4/45.abstract N2 - While cynics view investment constraints as a lawyers' way of managing risk or simply as a manifestation of the risk management of the 1950s when no computers and risk models were available, other observers regard constraints as a worst case safeguard against a breakdown in risk management practices and a practical reality of peer risk in institutional investing. A closer look at the costs of constraints suggests a new methodology to measure the impact of individual constraints on an investor's value added. This approach differs from current methods that either focus on a headline measure of information ratio shrinkage (also called transfer coefficient) or express the impact of constraints as distortions in implied alphas.TOPICS: Risk management, portfolio construction, performance measurement ER -