I have developed a low frequency equity trading strategy that seems to work well with stocks in the S&P 500. Someone asked me about the maximum capacity of the strategy (how much AUM I could handle), and that led me to think about how best to determine how much of each stock I could trade, with the considerations of slippage, market impact, and creating a footprint in the market with a large order in mind.
My initial thought was to assume that I could safely trade (that is avoid undue cost and visibility) a small percentage of each stock's ADV, so the maximum capacity of the strategy would be the dollar value of the sum of x % of ADV of all of the stocks. If each order was then roughly say <1% of the stock's ADV, I would probably enter these orders as limit orders with a minimum display size and the rest in reserve, with the expectation that the market will work its way through my limit. While this would minimize slippage, I am concerned that predatory systems could pick up on the reserve quantity, and that that will provide information. I could layer the order in at different price levels, but that could be expensive. Any thoughts on this are appreciated.
I am also thinking about adding money management considerations to each order size (Kelly Consideration or Fixed Ratio), which may only further complicate the question of max capacity. Is there a general rule of thumb for determining capacity at a high level? Cheers