Journal of Financial and Quantitative Analysis Vol. 58 No. 6 2023

Diseconomies of Scale in Quantitative and Fundamental Investment Styles

Richard B. Evans¹; Martin Rohleder²; Hendrik Tentesch³; Marco Wilkens²

¹ University of Virginia · ² University of Augsburg · ³ Portfolio Manager for the Firm Tecta Invest

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.

DOI

10.1017/s0022109022000618

Volume

58

Issue

6

Pages

2417-2445

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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