Style Chasing by Hedge Fund Investors
Jenke Ter Horst
Tilburg University - Center for Economic Research (CentER)
Ben Gurion University
September 10, 2013
Journal of Banking and Finance, Forthcoming
This paper examines whether investors chase hedge fund investment styles. We find that better-performing and more popular styles are rewarded with higher inflows in subsequent periods. This indicates that investors compare hedge fund styles in terms of recent performance and popularity, and they subsequently reallocate funds from less successful to more successful styles. Furthermore, we find evidence of competition between individual hedge funds of the same style. Funds outperforming the other funds in their styles and funds whose inflows exceed the average flows in their styles experience higher inflows in subsequent periods. One of the reasons for competition among same-style funds is investors’ search for the best managers. The high minimum investment required to invest in a hedge fund limits investors’ diversification opportunities and makes this search particularly important. Finally, we show that hedge fund investors' implementation of style chasing in combination with intra-style fund selection represents a smart strategy.
Number of Pages in PDF File: 47
Keywords: Investment styles, hedge funds, investor decisions, smart money, style investing, money flows
JEL Classification: G11, G12, G23
Date posted: February 16, 2009 ; Last revised: November 14, 2013
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