Unencumbered by Style: Why Do Funds Change Factor Loadings and Does It Help?

Anna Scherbina, Ting Bai and Jens Hilscher
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Jens Hilscher: American Enterprise Institute

AEI Economics Working Papers from American Enterprise Institute

Abstract: We show that active equity funds deliberately alter their factor loadings rather than maintaining a constant style. Changes are larger following quarters in which funds either under- or out-perform other funds based on returns or fund flows. Motivated by this observation, we identify a new measure of manager skill, which we call “tactical investment skill.†It captures a manager’s ex-ante observable ability to increase future returns through loadings changes. We show that high-skill managers outperform their low-skill peers in the following month in terms of raw returns and alphas. This outperformance is more pronounced following quarters with large loadings changes.

Keywords: Investment; Mutual Funds (search for similar items in EconPapers)
JEL-codes: A (search for similar items in EconPapers)
Date: 2024-04
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