What does dollar implementation shortfall indicate?

The concept of dollar implementation shortfall is primarily used to assess the performance of trading strategies and the costs associated with executing trades. It reflects the difference in returns between a hypothetical paper portfolio (which is created under ideal trading conditions with no market impact costs, commissions, or delays) and the actual performance of a real portfolio that has incurred these costs.

When evaluating dollar implementation shortfall, the focus is on quantifying how much return is lost due to various inefficiencies in the trading process, such as market impact, timing delays, and execution costs. The calculation reflects this by measuring the difference between the return achieved by the paper portfolio (based on ideal execution) and the return realized by the actual portfolio (taking into account the various trading costs).

Thus, the dollar implementation shortfall is indeed characterized as the return on the paper portfolio minus the return on the real portfolio, allowing for a clear representation of the cost associated with execution inefficiencies. This metric provides valuable insight for traders and portfolio managers in evaluating the effectiveness of their execution strategies and improving future trading decisions.