Fund Flows and Performance Under Dynamic Unobservable Managing Ability

AbstractThis paper provides a detailed analysis of the impact of daily mutual fund flow volatility on fund performance. I document a significant negative relationship between the volatility of daily fund flows and cross-sectional differences in risk-adjusted performance. This relationship is driven by domestic equity funds, as well as small funds, well-performing funds, and funds that experience inflows over the sample period. My results are consistent with performance differences arising from the transaction costs of nondiscretionary trading driven by daily fund flows, but not with performance differences arising from the suboptimal cash holdings that arise from fund flows.

Download Full-text

The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance

Quarterly Journal of Finance ◽

10.1142/s2010139212500036 ◽

2012 ◽

Vol 02 (01) ◽

pp. 1250003 ◽

Cited By ~ 24

Author(s):

Mila Getmansky

Keyword(s):

Hedge Funds ◽

Fund Performance ◽

Life Cycles ◽

Fund Flows ◽

Optimal Size ◽

Market Impact ◽

Specific Factors ◽

And Performance ◽

Capacity Constrained ◽

Asset Size

This paper analyzes the life cycles of hedge funds. Using the Lipper TASS database it provides category and fund specific factors that affect the survival probability of hedge funds. The findings show that in general, investors chasing individual fund performance, thus increasing fund flows, decrease probabilities of hedge funds liquidating. However, if investors chase a category of hedge funds that has performed well (favorably positioned), then the probability of hedge funds liquidating in this category increases. We interpret this finding as a result of competition among hedge funds in a category. As competition increases, marginal funds are more likely to be liquidated than funds that deliver superior risk-adjusted returns. We also find that there is a concave relationship between performance and lagged assets under management. The implication of this study is that an optimal asset size can be obtained by balancing out the effects of past returns, fund flows, competition, market impact, and favorable category positioning that are modeled in the paper. Hedge funds in capacity constrained and illiquid categories are subject to high market impact, have limited investment opportunities, and are likely to exhibit an optimal size behavior.

Download Full-text

Hedge Fund Flows and Performance Streaks: How Investors Weigh Information

Management Science ◽

10.1287/mnsc.2021.4067 ◽

2021 ◽

Author(s):

Guillermo Baquero ◽

Marno Verbeek

Keyword(s):

Hedge Funds ◽

Hedge Fund ◽

Cash Flows ◽

Fund Flows ◽

Hot Hand ◽

Highly Sensitive ◽

Wide Range ◽

Processing Abilities ◽

And Performance ◽

Types Of Information

Cash flows to hedge funds are highly sensitive to performance streaks, a streak being defined as subsequent quarters during which a fund performs above or below a benchmark, even after controlling for a wide range of common performance measures. At the same time, streaks have limited predictive power regarding future fund performance. This suggests investors weigh information suboptimally, and their decisions are driven too strongly by a belief in continuation of good performance, consistent with the “hot hand fallacy.” The hedge funds that investors choose to invest in do not perform significantly better than those they divest from. These findings are consistent with overreaction to certain types of information and do not support the notion that sophisticated investors have superior information or superior information processing abilities. This paper was accepted by David Simchi-Levi, finance.

Download Full-text

Why do Fund Managers Increase the Lottery-Like Characteristics of the Fund?

Korean Journal of Financial Studies ◽

10.26845/kjfs.2021.12.50.6.557 ◽

2021 ◽

Vol 50 (6) ◽

pp. 557-592

Author(s):

Minyeon Han ◽

Hyoung-goo Kang ◽

Kyoung Hun Bae

Keyword(s):

Mutual Funds ◽

Fund Flows ◽

Fund Managers ◽

And Performance

We investigate why fund managers invest in lottery-like stocks and whether the behavior that holds more lottery-like stocks affects performance. First, mutual funds that hold more lottery stocks may attract more fund flows. Our results support the theory that fund managers invest more in lottery-like stocks to reflect investors' preferences for extreme payoffs. Second, the level of lottery-like characteristics of mutual funds does not predict managers’ skill and performance. Therefore, fund managers holding more lottery stocks is not a result of managers’ skills. Third, lottery-like characteristics of mutual funds do not significantly affect performance in specific reporting periods (e.g., year-end or quarter-end). Based on this result, we conclude that fund managers do not invest more in lottery stocks to advance their career.

Download Full-text