Turnover Tax

Pulled a factor study last week and did the boring thing. I read the footnote.

The headline premium was 5.7 percent a year over the market. Nice number. Then a line further down the page: after the cost of actually trading the strategy, closer to 4.2. About a quarter of the edge was gone before it reached a single real account.

Here is the part most pitches skip. That give-back is not a one off. It is turnover, and turnover is a bill you pay whether the factor works or not.

A patient rule, the kind built on value or quality, trades maybe a quarter of itself in a year. It keeps almost all of its edge. A momentum rule turns over one and a half times a year, so more of the premium leaks out to spreads and market impact. Same underlying idea. Very different bill at the end of it.

The research even draws a line. Trade slower than roughly half the book a month and a factor tends to keep a net edge. Trade faster and most of it disappears into the cost of chasing the signal. Short term reversal, rebuilt every single month, looks gorgeous on paper and is basically gone once you pay to trade it.

Honest counter, because it matters. Measured on live trades, real costs run lower than the scariest academic estimates, so the big factors do survive at scale. But survive still means less than the number on the brochure.

So two habits. Read the net premium, not the gross one on the slide. And treat low turnover as a feature, not a sign the manager is asleep. A rule that keeps more of the edge simply because it trades less is not lazy. That is a design choice