Market Conditions and Fund Flows: Evidence from Hedge Funds

Wen-Hsiu Chou; Dongmin Ke; Danielle Xu

doi:10.32890/ijbf2013.10.1.1

Authors

Wen-Hsiu Chou Florida International University, United States
Dongmin Ke Kean University, United States
Danielle Xu Gonzaga University, USA and Hanken School of Economics, United States

DOI:

https://doi.org/10.32890/ijbf2013.10.1.1

Keywords:

Hedge funds, Flow sensitivities, Smart money effect, Performance persistence, Time-varying performance, Downside/upside volatility

Abstract

This paper investigates whether market conditions affect fund investor behaviour in the hedge fund industry, especially the volatility in the up and down markets. Using a sample of 5,254 individual hedge funds from January 1994 to December 2009, we find that hedge fund investors tend to invest less during up and down-volatile markets. They also adopt different investment strategies in these two market conditions. When market is calm and relatively predictable, there is almost no difference in their behaviors between up and down markets. We also find that smart money effect exists over both 3- and 12-month periods under all market conditions except volatile markets. A further investigation suggests that the observed smart money effect is largely driven by hedge fund performance persistence, which is present and significant is quiet markets only. The findings are relevant to portfolio theories concerning investor recognition of upside and downside volatilities.

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Publisher	UUM PRESS
ISSN	2811-3799
eISSN	2590-423X
Established	2003
DOI	10.32890/ijbf
Publishing Frequency	Biannually (January & July)

Market Conditions and Fund Flows: Evidence from Hedge Funds

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