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Smart Money or Smart about Money? Evidence from Hedge Funds

45 Pages Posted: 4 Nov 2009 Last revised: 16 Mar 2010

Gideon Ozik

EDHEC Business School

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: January 16, 2010

Abstract

This paper introduces a measure of fund-flow impact, based on a fund's contemporaneous return-flow relation, and demonstrates that the smart-money phenomenon predominantly stems from high-flow-impact funds. A smarter-money strategy, one that concentrates in high-flow-impact funds, fares significantly better than a strategy which concentrates in low-flow-impact funds and earns a premium of 6.5% annually over 1999-2008, after controlling for various risk factors and trading restrictions. Although the effect is strongly apparent for outflows, the analysis shows that a smarter-money-conscious long-only-investment portfolio significantly outperforms the hedge-fund index. The paper suggests that the smart-money effect is not necessarily indicative of superior investor ability to predict manager skill, but rather may reflect the ability of some investors to predict the behavior of other investors whose flow affects fund return.

Keywords: Hedge funds, Fund flows, Smart money, Asset pricing, Flow impact

JEL Classification: G12, G14

Suggested Citation

Ozik, Gideon and Sadka, Ronnie, Smart Money or Smart about Money? Evidence from Hedge Funds (January 16, 2010). Available at SSRN: https://ssrn.com/abstract=1499485 or http://dx.doi.org/10.2139/ssrn.1499485

Gideon Ozik

EDHEC Business School ( email )

Nice
France

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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