According to Clarke, de Silva and Thorley in their article, “Portfolio Constraints and the Fundamental Law of Active Management,” Financial Analysts Journal Vol.58, No.5 September/October 2002, pages 48-66, the constraints placed on portfolio managers affects the amount of the theoretical information ratio the manager can deliver to the client. In other words, the more limits you place on me the less of my expertise can I turn into returns for you.
The biggest limit is the long only constraint. This says I can buy a stock and I can sell a stock that I own, but I can't sell short. Having this single constraint means the manager can only deliver 60% of the information ratio possible.
The article set off a fire storm in the industry. It suggested that you didn't need to be able to short the entire value of the portfolio to get most of the information ratio. They looked at a 120/20% portfolio.
