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Smart beta, smart money

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  • Chen, Qinhua
  • Chi, Yeguang

Abstract

Factor-timing strategies in the U.S. produce weak returns and are strongly correlated to the basic factor-holding strategies. We present contrasting evidence from China, where actively managed stock mutual funds successfully time the size factor (small minus big) despite a negative unconditional loading. Size-factor timing is an important aspect of manager skill, as it attributes to over 50% of fund alpha. We show that the timing skill arises from funds’ intra-period trading. Relatedly, funds with bigger return gaps exhibit more timing skill. Moreover, we find that mutual funds increase their size-factor exposure after high market turnover. However, mutual funds’ factor-timing skill remains significant after controlling for lagged turnover.

Suggested Citation

  • Chen, Qinhua & Chi, Yeguang, 2018. "Smart beta, smart money," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 19-38.
    • Handle: RePEc:eee:empfin:v:49:y:2018:i:c:p:19-38
    DOI: 10.1016/j.jempfin.2018.08.002
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    Cited by:

    1. Cheng, Feiyang & Chiao, Chaoshin & Fang, Zhenming & Wang, Chunfeng & Yao, Shouyu, 2020. "Raising short-term debt for long-term investment and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 33(C).
    2. Zhang, Wei & Li, Yi, 2021. "Do visiting monks give better sermons? An analysis of the foreign experience of Chinese fund managers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    3. Chi, Yeguang & He, Jingbin & Wu, Fei & Yin, Bijiao, 2022. "Optimal information production of mutual funds: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 143(C).
    4. Antypas, Antonios & Caporale, Guglielmo Maria & Kourogenis, Nikolaos & Pittis, Nikitas, 2020. "Estimation of conditional asset pricing models with integrated variables in the beta specification," Research in International Business and Finance, Elsevier, vol. 52(C).
    5. Sha, Yezhou, 2020. "The devil in the style: Mutual fund style drift, performance and common risk factors," Economic Modelling, Elsevier, vol. 86(C), pages 264-273.
    6. Sha, Yezhou & Gao, Ran, 2019. "Which is the best: A comparison of asset pricing factor models in Chinese mutual fund industry," Economic Modelling, Elsevier, vol. 83(C), pages 8-16.
    7. Yeguang Chi & Xiao Qiao & Sibo Yan & Binbin Deng, 2021. "Volatility and returns: Evidence from China†," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1441-1463, December.
    8. Chen, Qinhua & Chi, Yeguang & Qiao, Xiao, 2020. "Follow the smart money: Factor forecasting in China," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Mutual funds; Emerging market; Factor timing; Smart beta; Performance attribution;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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