Investment Horizons, Systematic Risk, and Managerial Skills of Institutional Investors

Abstract

We examine the relationship between portfolio risk and equity returns over different investment horizons of institutional investors. Compared to long-term institutions, portfolios held by short-term institutions exhibit higher factor loadings in market, size, and momentum. In particular, they tend to hold smaller stocks and momentum stocks in the bull market. They also tend to trade for stocks with lower profitability in the bull market. Nevertheless, we find that systematic risk can account for the overall superior performance in the buy and sell portfolios of short-term institutions. Our results suggest that while short-term institutions exhibit market timing ability, they do not always generate abnormal returns after controlling for systematic risk.

Keywords: institutional investors; investment horizons; portfolio risk; portfolio characteristics

JEL Classification: G11; G12; G14; G20