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Hou Xue Zhang Q Factor

Updated quarterlyData needs: mediumlong onlyshort only

2015

Hou, K., Xue, C., Zhang, L. (2015). "Digesting Anomalies: An Investment Approach." Review of Financial Studies, 28(3), 650-705.

Read the paper →

In plain terms

Rank companies on two things: how little they spend on capex relative to assets (efficient investment) and how high their return on equity is. Top 25% combos go long, bottom 25% go short. Hold 3-12 months.

How it works

q-factor 2-component composite: low investment (|capex|/total_assets) and high profitability (ROE = net_income/total_equity). HXZ 2015 document the q-factor outperforms Fama-French 4-factor on most anomaly tests; the long top-quintile / short bottom-quintile pair earns +4-5%/yr post-1990.

Live results

0 times picked on its own · 212 times inside a blend (184 beat the stock) · updated 2026-06-06

This strategy is a frequent ingredient in blends that combine a few strategies on one stock. It has contributed to 212 such blended picks (184 of which beat simply holding the stock). Picking it on its own is only one of the ways it shows up.

How its picks scored vs. buy & hold

Each pick is graded on a recent year it was never tuned on, against simply owning the same stock

Where its edge concentrates

Share of picks in each company-size group that beat buy & hold

How often it trades

Active vs. patient. Bars on the left mean it waits for rare setups; bars on the right mean it trades often

Return vs. buy & hold

How much each pick beat or trailed simply owning the stock over the test year (extreme microcap moves trimmed)

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Data dependencies

Daily prices
Adjusted-close OHLCV for every US-listed ticker; primary price feed.
Income statements
A data feed this strategy reads, refreshed on its normal schedule.
Balance sheets
A data feed this strategy reads, refreshed on its normal schedule.
Cash flows
A data feed this strategy reads, refreshed on its normal schedule.

Expected edge

Reported return: +4-5%/yr
Tested over: T+45d to T+252d

+4-5%/yr on long-short q-factor pair (HXZ 2015).

Example tickers where this is likely to fire

AAPL GOOGL MSFT META V

Illustrative only, the signal fires based on the live data, not a fixed list.

Related families

Quality Minus JunkPrice & Market Behavior

Score a company on four 'quality' dimensions — profitability, growth, low debt, dividend payout. The top 25% combo go long, the bottom 25% go short. Hold 3-12 months.

Asset Growth AnomalyPrice & Market Behavior

Companies that grow their balance sheet aggressively (lots of new assets, M&A, capex spikes) tend to under-deliver the next 1-3 years — the market trusted the empire-building story too much. Bet on the boring low-growth names instead.

Cash ProfitabilityPrice & Market Behavior

Cash operating profit (backs out accrual fudges) over book equity is a sharper quality predictor than gross profit. Long the cash-rich.

Quality Minus JunkPrice & Market Behavior

Stocks whose gross profitability is improving versus their own past year AND that are trending up over 12 months get a long position; otherwise hold cash. A simplified single-stock take on the Quality Minus Junk idea; the full 4-factor composite is the quality_minus_junk family.

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