What is an expected outcome of a well-managed trading strategy regarding implementation shortfall?

A well-managed trading strategy aims to reduce implementation shortfall, which is the difference between the expected performance of an investment and the actual performance due to trading costs and market impact. When a strategy effectively minimizes costs associated with trading (such as commissions, spreads, and slippage) while also maximizing returns through optimal execution practices, it translates into a reduced implementation shortfall.

Minimization of costs ensures that more of the investment's potential returns are realized rather than lost to inefficiencies in the trading process. As a result, the expected outcome of a well-executed trading strategy is indeed the optimization of both costs and returns, leading to enhanced overall portfolio performance.

In contrast, focusing on trading frequency, transaction volume, or heightened market exposure may not necessarily contribute to minimizing implementation shortfall. For example, increasing trading frequency or transaction volume can lead to higher costs without guaranteeing better execution quality or returns. Similarly, heightened market exposure could increase risk without necessarily enhancing performance relative to costs. Understanding these dynamics is crucial for effectively managing a trading strategy to minimize implementation shortfall and achieve better investment outcomes.