On the anomaly tilts of factor funds

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 toward well‐known anomaly characteristics and that such tilts are highly persistent. Short positions of HMFs are important for amplifying their factor tilts. Moreover, HMFs with large factor tilts outperform corresponding ETFs, or HMFs with contrary tilts, both before and after accounting for implementation costs and fees. We link this outperformance to the use of short positions and higher factor‐related returns. Finally, we show that only HMFs achieve similar performance (net of costs) as the academic factors.