What does 'implementation shortfall' primarily measure?

Implementation shortfall primarily measures the difference between expected and actual performance of a portfolio. This metric reflects the impact of trading costs, market movements, and timing differences on the returns of a portfolio compared to a benchmark or expected return. By analyzing implementation shortfall, investors can identify how various factors contribute to performance deviations, which can highlight the effectiveness of trading strategies and execution.

This measurement incorporates both explicit costs, such as commissions and spreads, and implicit costs, including price impact and opportunity costs from not executing trades at optimal times. By focusing specifically on the difference between expected and actual performance, implementation shortfall gives a more comprehensive view of how effectively a portfolio's investment strategy has been executed.

In contrast, while measuring the total cost of executed trades and the return on paper versus real portfolios are important aspects of trading performance, they do not fully encapsulate the nuanced differences in expected versus actual portfolio outcomes. Similarly, improvement in portfolio management strategies is more of a qualitative assessment rather than a quantitative measure like implementation shortfall.