- The long-term returns of small-cap stocks primarily come from valuation improvements rather than dividends, buybacks, or earnings, indicating a persistent pricing error in the market that quantitative strategies can systematically exploit[1][7] - Small-cap indices exhibit a right-skewed excess return distribution, with a higher probability of extreme positive returns compared to large-cap indices, reflecting higher elasticity and stronger performance during uptrends[15][16] - During credit expansion phases, small-cap indices tend to perform better due to higher elasticity, as seen in the current economic environment characterized by loose monetary policy and credit recovery[19][22] - The systemic crash risk for small-cap stocks is currently low, as indicated by factor timing metrics such as factor momentum, factor dispersion, and factor crowding, which are not at extreme levels[20][24] - Small-cap stocks have long-term alpha potential, with quantitative strategies in small-cap index components showing higher excess return capabilities compared to mid-cap and large-cap indices[27][30][31] Quantitative Models and Factors - **GK Model**: Used to decompose historical returns of the CSI All Share Index and small-cap indices, showing that small-cap returns are driven mainly by valuation increases[7] - **Factor Timing Metrics**: Include factor momentum, factor dispersion, and factor crowding, used to assess the timing of factor investments and systemic risk[20][23] Backtesting Results - **Small-cap funds**: From 2016 to 2025, small-cap funds achieved an average cumulative return of 71.62%, significantly outperforming the CSI 1000 Total Return Index, which had a cumulative return of -34.80%[32][33][34] - **E Fund Yibai Intelligent Quantitative Strategy A**: Demonstrated a stable long-term excess return since early 2024, with an annualized return of 38.50% compared to the Wind All A Equal Weight Index's 14.45%[39][40][42] - **T-M Model Analysis**: The fund showed a stock selection ability of 0.04% and a market timing ability of 0.91, indicating strong stock-picking skills[65][66][67]