What is the implementation shortfall?

The implementation shortfall is indeed defined as the difference between the money return on a notional account and the actual portfolio's return. This concept captures the total costs and lost opportunities associated with executing a trade over time, including market impact, timing discrepancies, and any trading-related costs.

In essence, it reflects the impact of trading decisions on an investor's position. When a trade is not executed at the optimal price, or if there are delays in execution that lead to changes in market prices, these factors contribute to the difference in returns between what could have been earned hypothetically (on a notional account that did not engage in trading) and what was actually earned on the traded account.

This understanding of implementation shortfall is crucial for investors and portfolio managers as it helps them gauge the effectiveness of their trading strategies and make more informed decisions in the future. It also serves as an important measure in evaluating the performance of trading activities against expected outcomes, making it an essential concept in portfolio management.