Return Decomposition of Hybrid Strategies in the Brazilian Market: Evidence of Genuine Alpha and Factor Exposure

Paper: arXiv 2611.06919

Authors: Francisco Robson do Nascimento de Freitas, Felipe Macedo Zumba, Lucio Marassi, Jian Vingthor Souza Luna de Azevedo

Abstract

This paper decomposes the return sources of a hybrid portfolio combining a fundamentalist screen - based on P/E, ROE, Net Margin, Current Ratio, and P/BV - with a moving-average crossover system (SMA 9/46), applied to the Brazilian stock exchange (B3) from January 2000 to December 2025 (300 monthly observations). CAPM and Fama-French three- and four-factor models estimated by OLS with heteroskedasticity-robust standard errors identify a positive and statistically significant Jensen alpha of 1.11% per month (p = 0.005) in the three-factor model. In the four-factor model with momentum, alpha remains significant (0.98% p.m.; p = 0.009), while momentum is not significant (p = 0.409). The central - and unexpected - finding is the non-significance of the HML factor (beta_h = 0.1266; p = 0.544): despite explicit value criteria, returns do not load on the value premium, likely because ROE and Net Margin tilt selection toward quality firms. By contrast, the SMB factor is highly significant (beta_s = 0.38; p = 0.000), and the portfolio displays a defensive profile (market beta approximately 0.58). Although the descriptive Sharpe ratio of the portfolio (0.443) exceeds that of the Ibovespa (0.039), the difference is not statistically significant under the Jobson-Korkie test (Z = 1.427; p = 0.154). These findings advance the debate on semi-strong efficiency in the Brazilian market and carry direct implications for active strategy pricing and disclosure.

Complexity vs Empirical Score

• Math Complexity: 5.0/10
• Empirical Rigor: 6.0/10 (capped from 7.0: transaction costs not modelled; no out-of-sample test; see penalty flags)
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs standard econometric models (CAPM, Fama-French) with appropriate statistical considerations (heteroskedasticity-robust errors) and a well-defined backtesting methodology. The findings, particularly the non-significance of HML despite value criteria, offer a novel insight for the Brazilian market.

Research Flowchart

  flowchart TD
    A[Research Goal: Decompose returns of hybrid strategy & identify alpha/factor exposure] --> B{Methodology: Hybrid Portfolio Construction};
    B --> C[Data: B3 Equities (Jan 2000 - Dec 2025)];
    C --> D{Computational Process: OLS Regression (CAPM, Fama-French 3/4 Factor Models)};
    D --> E[Outcome 1: Significant Jensen Alpha (1.11% p.m. in FF3, 0.98% p.m. in FF4)];
    E --> F[Outcome 2: Non-significant HML (Value) factor loading; Significant SMB (Size) factor loading];
    F --> G[Outcome 3: Defensive Market Beta (~0.58); Superior but not statistically significant Sharpe Ratio];
    G --> H[Implications: Semi-strong efficiency debate, active strategy pricing];