Turnover measures trading activity as the fraction of portfolio value that changes hands per period. Annual turnover of 100% means the entire portfolio is replaced, on average, once per year.
Net alpha = Gross alpha − (Turnover × Transaction Costs per Trade)
This relationship shows that turnover is the key link between a signal's gross IC and its delivered net return. A signal with high IC but very fast alpha decay forces high turnover, which can erode or eliminate the gross edge entirely at institutional scale.
Turnover and signal half-life
The required turnover of a strategy is closely related to the signal's half-life. A signal that decays in one day requires daily or intraday rebalancing; one that decays over a month can be rebalanced weekly or monthly. High-turnover strategies are viable only at very low transaction costs — typically requiring direct market access, large-cap liquid names, and institutional-scale execution infrastructure.
In the Fundamental Law
Turnover constraints reduce the Transfer Coefficient (TC): if you cannot rebalance fully to the current optimal weights each period, the portfolio drifts, reducing how fully the signal is expressed in live positions.