The investment universe consists of NYSE, AMEX, and NASDAQ stocks. Data on institutional ownership is extracted from WRDS Thomson Reuters Institutional (13f) Holdings database. If a stock is reported in the CRSP, but there is no data on institutional ownership, it is assumed to have this value at 0.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Quarterly | MARKET: equities | KEYWORD: Institutional Ownership, Macro Factor
I. STRATEGY IN A NUTSHELL
The strategy trades NYSE, AMEX, and NASDAQ stocks using 11 macro factors and institutional ownership data. Stocks are ranked by factor betas and residual institutional ownership, then sorted into quintiles to construct long-short portfolios, equally-weighted and rebalanced quarterly.
II. ECONOMIC RATIONALE
Institutions behave as rational, risk-averse investors, pricing macro-related risks while ignoring mispricing captured by characteristic factors. High residual institutional ownership stocks show strong return premiums due to investor heterogeneity, reflecting the interplay of risk and mispricing.
III. SOURCE PAPER
Which Factors Are Priced? It Depends on Who You Ask: Investor Heterogeneity and Factor Pricing [Click to Open PDF]
Zhao Jin, Central University of Finance and Economics (CUFE) – School of Finance
<Abstract>
Institutional ownership plays important and strikingly opposite roles in factor pricing for macro-related and characteristic factors. Early studies have found that the beta-sorted portfolios of both types of factors have a tiny and insignificant return spread. However, the macro-related (characteristic) factors have a significantly larger (smaller) risk premium within stocks held by institutions compared to stocks held by retail investors. For long-short portfolios based on macro-related composite beta, those formed with stocks with high institutional ownership have a return spread that is 66 basis points higher per month relative to those owned mainly by retail investors. In contrast, composite characteristic beta-sorted long-short portfolios formed with stocks owned mainly by retail investors earn a return spread that is 81 basis points higher per month relative to those owned mainly by institutions. This empirical evidence indicates that the “flat” risk premium of pervasive factors can be partly attributed to the tug-of-war between institutions and retail investors, with the former behaving more consistently with the fundamental risk-averse investors described in classic models and the latter behaving in the opposite way. It is also consistent with the conjecture that macro-related factors are more likely to be a proxy for risk, whereas characteristic factors are more likely to be a proxy for mispricing.
IV. BACKTEST PERFORMANCE
| Annualised Return | 8.21% |
| Volatility | 14.5% |
| Beta | N/A |
| Sharpe Ratio | 0.57 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
