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Liquidity & Factor Performance

How Do Minimum Liquidity Requirements Impact Factor Returns?

Nicolas Rabener
10 min read
27 Jan 2020

SUMMARY

  • Most institutional investors can only trade the largest, most liquid stocks
  • Introducing minimum liquidity requirements impacts factors differently
  • Factor portfolio construction with liquidity constraints is especially challenging in small stock markets

INTRODUCTION

Index funds have breached $11 trillion assets under management in late 2019 to the detriment of active managers according to data from Morningstar. As passive investing has increased in popularity, critical voices have become louder and various accusations have been made. Some of them have merit, most do not.

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