What is an advantage of implementation shortfall?

An advantage of implementation shortfall is that it links trading costs directly to portfolio manager activities. This metric measures the difference between the actual return on an investment and the return that could have been achieved had the trade been executed perfectly. By capturing both market impacts and execution costs, implementation shortfall provides a comprehensive view of how trading decisions and execution strategies affect a portfolio's overall performance. This allows for a more accurate assessment of a portfolio manager's effectiveness and the costs incurred during trading, facilitating improved decision-making and accountability.

The ability to assess trading costs in relation to the manager’s actions helps pinpoint areas where execution could be improved or where strategies may have underperformed. By focusing on the specific choices made by the portfolio manager, implementation shortfall aids in evaluating performance, ensuring that any allowances for market movement or slippage are taken into consideration, thus leading to more informed trading strategies in the future.