Capacity is usually quoted as a fund-level number, as though it were a property of the manager. It is not. It is set by the liquidity of the instruments a signal trades and the speed at which it is forced to trade them, and it therefore has to be estimated signal by signal.
Trading moves the price against you, and the move grows faster than linearly in participation. The standard square-root form is adequate for estimating where an edge is exhausted, which is the only question capacity has to answer.
Two strategies running the same nominal capital can differ by orders of magnitude in what they can absorb. A slow signal in large-capitalisation equities trades a small fraction of enormous daily volume and is constrained by very little. A fast signal in the same names is constrained severely, because it must complete its turn inside a short window. Liquid futures absorb size well and offer few instruments; digital assets are the reverse, deep at the top and thin immediately below it, with liquidity that varies by venue and by hour rather than being a stable property of the instrument. Private-market signals are not capacity-constrained by microstructure at all — they are constrained by how many genuine situations exist in a period, which is a different quantity entirely.
Aggregating those into one figure and calling it the fund's capacity discards the only information an allocator needed.
Per signal, as the assets under which the strategy's net edge remains above a stated threshold, with the participation assumption and the volatility regime it was computed under both written down. A capacity figure that does not name its assumptions cannot be checked, and one that cannot be checked should not be relied on.
Research commentary on measurement. It is not an offer, a solicitation, or investment advice, and it recommends no security, strategy or transaction.