Where Retail Rules: Buying Into China’s Alpha Opportunity

Even before the recent trade war, the U.S. president had a hand in China’s market, by way of “concept” stocks. They are just one of the quirks found in retail heavy emerging markets like China, whose inefficiencies—and alpha opportunity—are traced to non-professionals trading as much for entertainment as for profit. In the research below, we investigate the evolution of retail participation in China A shares, the remarkable inefficiencies that creates, and the implications for professional investors.

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ESG-in-Need

ESG in Need: Beyond the ‘Good Karma’ Lens

ESG investing has become more in vogue in the past five years. Part of this may be driven by an on-faith belief, supported by shallow anecdotal evidence, that investing in ethical companies (high ESG companies) must lead to better investment outcome. You could call this belief the “good karma” principal in investing.

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Illiquidity and Factor Returns

Factor returns are often reported as the average of factor returns among large stocks and the factor returns among small stocks. However, factor returns among small, illiquid stocks are significantly higher than those among larger, more liquid stocks, suggesting that the factor returns in the literature are exaggerated and cannot be implemented with substantial assets.

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Sourcing Alpha in Emerging Markets

Emerging markets equity beta provides investors with a welcome source of portfolio diversification. But inefficient markets dominated by heavy retail trading also present a compelling alpha opportunity for portfolios tailored to the nuances of EM.

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