Diseconomies of Scale in Quantitative and Fundamental Investment Styles
Journal of Financial and Quantitative Analysis, forthcoming
48 Pages Posted: 18 Mar 2017 Last revised: 23 Jun 2022
Date Written: March 31, 2022
Abstract
We examine diseconomies of scale for two different investment approaches: quantitative and fundamental. Using separate account (SA) data where the investment approach is self-identified, we find that fundamental SAs exhibit greater diseconomies of scale than quantitative SAs. Looking at liquidity costs, we find that quantitative SAs hold more diversified portfolios of higher liquidity stocks than fundamental SAs, thereby reducing their expected liquidity costs. We also find that consistent with lower information processing/hierarchy costs, the speed of information diffusion is higher for quant SAs. Accounting for these differences helps to explain the differences in diseconomies of scale.
Keywords: Diseconomies of scale, quantitative, fundamental, performance, flows, hierarchy costs, information processing, separate accounts, institutional investing
JEL Classification: G11, G12, L11, L23, L25
Suggested Citation: Suggested Citation