On the Anomaly Tilts of Factor Funds

Abstract

By analyzing portfolio holdings, we find that a significant subset of Hedged Mutual Funds (HMFs) and smart-beta Exchange-Traded Funds (ETFs) tilt their portfolios towards well-known anomaly characteristics and that such tilts are highly persistent. Short positions of HMFs amplify their factor tilts. Most single-factor ETFs target multiple factors, while many also exhibit offsetting tilts to other factors. HMFs with large factor tilts outperform corresponding ETFs, which is driven by short positions and higher factor-related returns. Overall, we show the superior factor replication ability of HMFs over ETFs, and that HMFs achieve similar (or better) performance as the academic factors.

Keywords: Hedged Mutual Funds, Exchange-Traded Funds, Factor Tilts, Anomalies, Performance

JEL Classification: G10, G11, G14, G23