It is well known that high-beta stocks are associated with a low alpha relative to the capital asset pricing model and to the Fama–French three-factor model. We show that the beta anomaly in the Japanese market is attributable to foreign institutional investors, not domestic individuals. Foreigners overweight high-beta stocks; the anomaly weakens or reverses when their investment increases and strengthens when it decreases; and they invest more in high-beta than low-beta stocks when increasing investment and sell high-beta more than low-beta stocks when reducing it. We do not find analogous results for individual investors. Our results suggest that the beta anomaly reflects a preference for high-beta securities by institutional investors aiming to beat a benchmark.