Smart Beta, Smart Money

38 Pages Posted: 17 Aug 2017 Last revised: 22 Feb 2018

See all articles by Qinhua Chen

Qinhua Chen

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Yeguang Chi

University of Auckland, Business School, Department of Accounting and Finance

Date Written: December 16, 2017

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. We show that the timing skill arises from funds’ intra-period trading. Relatedly, funds with bigger return gaps exhibit more timing skill. Furthermore, size-factor timing is an important aspect of manager skill, as it attributes to over 50% of fund alpha. Finally, we show that timing skill matters to funds’ performance persistence, especially among high-alpha funds.

Keywords: factor timing, smart beta, mutual funds, return forecasting

Suggested Citation

Chen, Qinhua and Chi, Yeguang, Smart Beta, Smart Money (December 16, 2017). 30th Australasian Finance and Banking Conference 2017, Available at SSRN: https://ssrn.com/abstract=3020426 or http://dx.doi.org/10.2139/ssrn.3020426

Qinhua Chen

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Yeguang Chi (Contact Author)

University of Auckland, Business School, Department of Accounting and Finance ( email )

Private Bag 92019
Auckland
New Zealand

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