Smart Beta, Smart Money
38 Pages Posted: 17 Aug 2017 Last revised: 22 Feb 2018
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
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