Which Fund Flow?

56 Pages Posted: 30 Oct 2019 Last revised: 8 Sep 2021

See all articles by You Zhou

You Zhou

University of Leeds - Faculty of Business

Peng Li

University of Leeds - Division of Accounting and Finance

Charlie X. Cai

University of Liverpool Management School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: September 8, 2021

Abstract

One of the ongoing debates in asset pricing is whether investors are rational to use the CAPM alpha to direct their fund flow. We seek to settle the debate in two steps. First, we attribute, by using the Shapley value approach, fund-level net flow to different determinants (which alpha drives fund flows?). Second, we assess how future fund performance is related to the different types of fund flow from the first step (which fund flow predicts future performance?). We show that the CAPM-alpha flow is the most consistent predictor of short term performance. However, we also show investors do not only use the CAPM-alpha as a skill measure and chase performance but that they dynamically switch between momentum and contrarian strategies when using CAPM-alpha as a signal. Overall, our evidence suggests that CAPM has been a useful model for fund investors but this success needs to be attributed to the smartness of the fund investors in their use of CAPM.

Keywords: mutual-fund flows, risk factors, non-risk factors, smart-money effect, CAPM

JEL Classification: G11, G12

Suggested Citation

Zhou, You and Li, Peng and Cai, Charlie Xiaowu and Keasey, Kevin, Which Fund Flow? (September 8, 2021). Available at SSRN: https://ssrn.com/abstract=2839798 or http://dx.doi.org/10.2139/ssrn.2839798

You Zhou

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

Peng Li

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Charlie Xiaowu Cai (Contact Author)

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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