PT  - JOURNAL ARTICLE
AU  - Bernd Scherer
AU  - Xiaodong Xu
TI  - The Impact of Constraints on Value-Added
AID  - 10.3905/jpm.2007.690605
DP  - 2007 Jul 31
TA  - The Journal of Portfolio Management
PG  - 45--54
VI  - 33
IP  - 4
4099  - https://pm-research.com/content/33/4/45.short
4100  - https://pm-research.com/content/33/4/45.full
AB  - 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