Flows, Price Pressure, and Hedge Fund Returns

45 Pages Posted: 8 Jun 2011 Last revised: 4 Sep 2012

See all articles by Katja Ahoniemi

Katja Ahoniemi

Imperial College Business School

Petri Jylha

Aalto University

Date Written: July 19, 2012


We study how capital flows affect hedge fund returns. The contemporaneous relation is positive: funds with high flows outperform funds with low flows during the month of the flows. This immediate reaction, combined with feedback trading, gives rise to a cycle: flows exert price pressure, this effect on returns induces more flows, and these flows cause further price pressure. The cycle is so strong that it takes almost two years before a full return reversal is witnessed. This flow-return cycle also contributes to the observed persistence in hedge fund performance. The impact of flows on returns also has implications for performance evaluation: roughly one third of the estimated hedge fund alphas are due to flows.

Keywords: Hedge Funds, Price Pressure, Smart Money, Momentum

JEL Classification: G12, G14, G23

Suggested Citation

Ahoniemi, Katja and Jylha, Petri, Flows, Price Pressure, and Hedge Fund Returns (July 19, 2012). Available at SSRN: https://ssrn.com/abstract=1859623 or http://dx.doi.org/10.2139/ssrn.1859623

Katja Ahoniemi (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
London, SW7 2AZ
United Kingdom

Petri Jylha

Aalto University ( email )

P.O. Box 21220
Aalto, 00076

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