Factor Investing Funds: Replicability of Academic Factors and After-Cost Performance
46 Pages Posted: 2 Feb 2023 Last revised: 14 Feb 2023
Date Written: November 1, 2022
Abstract
Do factor investing funds successfully capture the premiums associated with academic factors? We explore this question using the growing number of factor investing funds that seek to capture those premiums. While, on average, such funds do not outperform, we find that the factor investing funds with the portfolios that most closely match their academic factors—determined using our novel, holding-based ‘active characteristic share’ measure—significantly outperform those that less closely match. Furthermore, adjusting for stock size, we conclude that the answer to our question is “yes” for closely matching factor investing funds, which net of costs duplicate the paper performance of the long side of academic factors.
Keywords: Mutual fund, factor investing, alpha, active share, cost
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