Reverse Foreign Investor Strategy Failed! The Truly Effective Institutional Following Method

Can You Really Make Money Going Against Foreign Investors?

A common saying online:

"Foreign investors are harvesting retail investors, just do the opposite to make money!"

Is this assumption reasonable? Let's verify with data.

The results are surprising:

• Reverse Foreign Investor Strategy: -11% to +7% CAGR
• Trust Fund Buying + Revenue Strategy: 31.68% CAGR

Reverse foreign investor strategy not only didn't profit, it lost money! But we found a truly effective institutional strategy.

Note: The following are historical backtest results and do not represent future performance.

Hypothesis Testing: Pure Reverse Foreign Investor Strategy

First, let's test the original hypothesis: buy when foreign investors sell.

Backtest "Reverse Foreign Investor" strategy:

• Condition: Foreign investors sell for 5 consecutive days
• Buy stocks meeting the condition
• Hold for one month then rebalance

from finlab import data
from finlab.backtest import sim
 
# Get foreign investor trading data
外資買賣超 = data.get('institutional_investors_trading_summary:外陸資買賣超股數(不含外資自營商)')
vol = data.get('price:成交股數')
 
# Condition: Foreign investors sell for 5 consecutive days
外資連續賣 = (外資買賣超 < 0).sustain(5)
vol_filter = vol.average(20) > 300 * 1000
 
# Reverse operation: buy when foreign investors sell
position = 外資連續賣 & vol_filter
 
# Backtest
report = sim(position.loc['2015':], resample='M', position_limit=0.1, upload=False)
report.to_html('reverse_foreign.html')

Reverse Foreign Investor Strategy Performance

Reverse foreign investor strategy doesn't work! Foreign investors may have valid reasons for selling (company declining).

Change of Thinking: Trust Funds More Predictive Than Foreign Investors?

Since reverse foreign investor doesn't work, what about following institutional buying?

We discovered a key insight: Trust funds have more predictive power than foreign investors

Reasons:

1. Focus: Trust funds focus on Taiwan stocks, foreign investors are global
2. Information Advantage: Trust funds research small-mid caps more deeply
3. Holding Period: Trust funds hold longer, indicating stronger conviction

Backtest "Trust Fund Buying" strategy:

• Condition: 10-day cumulative trust fund buying > 15,000 shares
• Liquidity: 20-day average volume > 300 lots
• Select top 10 by trust fund buying amount

from finlab import data
from finlab.backtest import sim
 
# Get trust fund trading data
投信買賣超 = data.get('institutional_investors_trading_summary:投信買賣超股數')
vol = data.get('price:成交股數')
 
# Trust fund cumulative buying
trust_sum = 投信買賣超.rolling(10).sum()
trust_buy = trust_sum > 15000
 
# Liquidity filter
vol_filter = vol.average(20) > 300 * 1000
 
# Select top 10 by trust fund buying
cond = trust_buy & vol_filter
position = trust_sum[cond].is_largest(10)
 
# Backtest
report = sim(position.loc['2015':], resample='M', upload=False)
report.to_html('trust_buy.html')

Trust fund buying strategy achieves about 15-20% annualized, much better than reverse foreign investor. But can it be better?

Problem Analysis: Pure Flow Isn't Enough

A problem with pure trust fund buying: buying stocks without fundamental support

Observations:

1. Some stocks with trust fund buying have declining revenue
2. Some are short-term speculative plays without sustainability

Solution: Add revenue screening to ensure improving fundamentals