@article {Scherer45, author = {Bernd Scherer and Xiaodong Xu}, title = {The Impact of Constraints on Value-Added}, volume = {33}, number = {4}, pages = {45--54}, year = {2007}, doi = {10.3905/jpm.2007.690605}, publisher = {Institutional Investor Journals Umbrella}, abstract = {While cynics view investment constraints as a lawyers{\textquoteright} 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{\textquoteright}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}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/33/4/45}, eprint = {https://jpm.pm-research.com/content/33/4/45.full.pdf}, journal = {The Journal of Portfolio Management} }