Lamar Van Dusen is explaining the Optimal Turnover Revisited and Levels Corresponding to the Highest Net Return. Lamar Van Dusan provides all financial solutions and he is so talented in his work.

1. Lamar Van Dusen
Optimal Turnover Revisited
Levels Corresponding to Highest Net Return

2. 1
Capacity Analysis
Academic Definitions and Industry Practice
The dependence between portfolio performance and size of fund
The study of ways to increase AUM for a target level of return
Identification of optimal turnover for every level of AUM
How to expand fund size while ‘remaining efficient’
Current investment strategy will lose 15 places in its ranking by growing
to $5B
Based on a peer group of 746 names the fund will likely fall into the
second quartile by growing to $6B
Growing to $3.5B, while keeping within first quartile, might be possible
with careful liquidity planning
At a level of $2.5B, there is room to increase turnover

3. 2
An Alternative View of Portfolio Capacity Analysis
General themes
ex ante versus ex post
strategy space underlying
investment decisions
Fixed portfolio
strategy
Determination of
turnover and net
returns jointly
Capacity
Conclusions
Ex post analysis
Ex ante analysis

4. 3
Cost and Fixed Portfolio Strategies
Daily Market-Impact Costs for U.S. Indices Trade Lists up to $5 Billion
Comparative Market-Impact Costs
US Index Lists Trading One-Day VWAP $100M to $5B
(cost estimates as of August 31, 2006)
0
10
20
30
40
50
60
70
80
90
100
110
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000
Dollar Volume Trading One-Day VWAP ($mil)
DailyMarket-ImpactCost(bps)
SP500 Equal Weight
SP500 Index Weight
R2000 Equal Weight
R2000 Index Weight

5. 4
Past is Prologue
“Optimal” Turnover
Optimal Turnover, Net Return Decrease with Higher AUM
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%
Monthly Turnover Rate
NetAnnualReturn
Net Return ($20B)
Net Return ($10B)
Net Return ($5B)
Net Return ($2B)
Paper Return
Optimal Turnover Rates for Different Levels of Assets Under Management

6. 5
An Efficient Frontier for Turnover
The Turnover Efficient Frontier
0%
1%
2%
3%
4%
5%
6%
7%
0% 25% 50% 75% 100% 125% 150%
Monthly Turnover Rate
NetAnnualReturn
Net Return ($10B)
Net Return ($5B)
Net Return ($2B)
Turnover Efficient Frontier
Sub-Optimal turnover performance drag
(A) Optimal turnover $2B AUM
(C) Optimal turnover $5B
(B) Sub-Optimal turnover $5B AUM

7. 6
Regional Weights in a Tangent Portfolio
August 2008
$500 Million
39
46
3
7
42
31
16 16
0
5
10
15
20
25
30
35
40
45
50
North
Am.
Latin
Am.
Europe Asia
paper
100%
Source: Investment Technology Group, Inc.

8. 7
The Smoking Gun
Optimization and Costs

9. 8
Turnover Determined
Return vs. realized turnover for different portfolio wealth
-0.40%
-0.35%
-0.30%
-0.25%
-0.20%
-0.15%
-0.10%
10% 20% 30% 40% 50% 60% 70% 80% 90%
realized monthly turnover
monthlyreturn
tau=0, wealth=$250mln tau=20, wealth=$250mln tau==50, wealth=$250mln
tau=0,wealth=$1bln tau=20, wealth=$1bln tau=50, wealth = $1bln
A250
A1000

10. 9
Optimal Turnover Revisited
Levels Corresponding to Highest Net Return
Optimal Turnover for a Given tau and Portfolio Wealth
0%
5%
10%
15%
20%
25%
30%
35%
40%
250 500 1000 2000 5000
Portfolio wealth, $mln
Tunover,%permonth
-0.25%
-0.20%
-0.15%
-0.10%
-0.05%
0.00%
Return,%permonth
return optimal tau return tau=0 optimal turnover
turnover tau=0 turnover tau=50

11. 10
Removing Turnover Constraints
The envelope curve which traverses all possible turnover levels for a $500mln fund
and which passes through the highest net return

12. 11
Trading Strategy and Turnover
Net return vs. realized turnover
-0.28%
-0.23%
-0.18%
-0.13%
-0.08%
-0.03%
0.02%
1% 2% 3% 4% 5% 6% 7% 8%
realized monthly turnover
monthlyreturn
$5Bn, tau=30, 1-day VWAP $5Bn, tau=30, 10% VolPart
$500mln, tau=50, 10% VolPArt $500mln, tau=50, 1-day VWAP

13. 12
Two Lessons from the Analysis
Previous focus on turnover as a choice variable, and on its role as
a proxy for implementation cost, is misplaced
• Considering stock-specific transaction costs at the portfolio construction
stage enables higher turnover levels
• Turnover levels are determined through the interaction of alpha predictions
and expected cost estimates
• Managing at higher turnover levels allows for faster processing of new
information, and in conjunction with cost control, leads to superior net return
Limiting the strategy space within which portfolio strategy is
formulated negatively impacts returns and reduces the capacity of
a fund
• Limiting that set of strategies also distorts capacity analysis and biases
capacity choice down, in general
• There is particular importance to adding trading strategy to the strategy space
underlying the investment decision

14. 13
Disclaimers
The information contained herein has been taken from trade and statistical services and other
sources we deem reliable but we do not represent that such information is accurate or
complete and it should not be relied upon as such. No guarantee or warranty is made as to the
reasonableness of the assumptions or the accuracy of the models or market data used by
Investment Technology Group, Inc. or the actual results that may be achieved. These materials
are for informational purposes only, and are not intended to be used for trading or investment
purposes or as an offer to sell or the solicitation of an offer to buy any security or financial
product. These materials do not provide any form of advice (investment, tax or
legal). Investment Technology Group, Inc. is not a registered investment adviser and does not
provide investment advice or recommendations to buy or sell securities, to hire any
investment adviser or to pursue any investment or trading strategy.
Any opinions expressed herein reflect the judgment of the individual presenter as this date and
do not necessarily reflect the opinions of Investment Technology Group, Inc. All information,
analysis and terms set forth herein are indicative, based on, among other things, market
conditions as of the time of this presentation, and are subject to change without notice.

15. 14
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