Can Foreign Equity Funds Outperform Their Benchmarks? New Evidence from Fund-Holding Data for China

We investigate whether foreign institutional investors can outperform domestic benchmarks. Using portfolio holding-based approaches for the Chinese Qualified Foreign Institutional Investors (QFIIs), we identify fund’s active manager opinions and information on the future value of stocks. We find stocks actively traded by QFIIs, and stocks with higher deviation from benchmarks (DFB) outperform their benchmarks in the subsequent one to three quarters. Such “hot hand” phenomenon is driven by foreign institutions’ investment skill in incorporating stale information rather than fresh information into asset pricing. Our findings shed new light on the roles of foreign equity funds in eliminating mispricing in emerging markets, and provide evidence on rethinking the role of financial intermediation in a capital-controlled economy.