Hedge fund flows and performance streaks: How investors weigh information

Arbeitspapier

We examine the relative weights hedge fund investors attach to past information in the fund selection process. The weighting scheme appears inconsistent with econometric forecasting models that predict fund returns, alphas or Sharpe ratios. In particular, investor flows are highly sensitive to performance streaks despite their limited predictive power regarding fund performance. Further, allocations based on forecast models' out-of-sample predictions beat investor allocations by a significant margin, which suggests that the latter are suboptimal and reflect overreaction to certain types of information. Our findings do not support the notion that sophisticated investors have superior information or superior information processing abilities.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESMT Working Paper ; No. 15-01

Classification and Topics

• Classification: Management ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Subject: hedge funds ; money flows ; extrapolative expectations ; law of small numbers ; performance streaks ; relative weights ; smart money

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Baquero, Guillermo ; Verbeek, Marno
• Event: Veröffentlichung
• (who): European School of Management and Technology (ESMT)
• (where): Berlin
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/106816
• URN: urn:nbn:de:101:1-201412018942
• Last update: 10.03.2025, 11:43 AM CET