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Style Chasing by Hedge Fund Investors

47 Pages Posted: 16 Feb 2009 Last revised: 31 Oct 2015

Jenke ter Horst

TIAS School for Business and Society

Galla Salganik-Shoshan

Ben-Gurion University of the Negev

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2013

Abstract

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.

Keywords: Investment styles, hedge funds, investor decisions, smart money, style investing, money flows

JEL Classification: G11, G12, G23

Suggested Citation

ter Horst, Jenke and Salganik-Shoshan, Galla, Style Chasing by Hedge Fund Investors (September 10, 2013). Journal of Banking and Finance, Vol. 39, pp. 29-42, 2014. Available at SSRN: https://ssrn.com/abstract=1343281 or http://dx.doi.org/10.2139/ssrn.1343281

Jenke Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Galla Salganik-Shoshan (Contact Author)

Ben-Gurion University of the Negev ( email )

Beer Sheva
Israel

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