When Fund Flows Take the Fun (Alpha) Away

44 Pages Posted: 30 Apr 2015 Last revised: 7 Dec 2015

Benjamin Golez

University of Notre Dame

Sophie Shive

University of Notre Dame - Department of Finance

Date Written: December 7, 2015

Abstract

We design a new test for diseconomies of scale at the mutual fund level, and document that quarterly changes in fund performance are negatively related to lagged predicted fund flows. The effect is economically and statistically significant for both inflows and outflows. Results hold for factor alphas and benchmark adjusted returns, and are robust to econometric biases. The flow-performance mechanism is strongest for more active funds with higher expense ratios and for funds trading smaller and more illiquid stocks. Consistent with the Berk and Green (2004) model, we find that alphas would be more cross-sectionally dispersed and more persistent without the damping effects of flows.

Keywords: diseconomies of scale, mutual funds

JEL Classification: G23

Suggested Citation

Golez, Benjamin and Shive, Sophie, When Fund Flows Take the Fun (Alpha) Away (December 7, 2015). Available at SSRN: https://ssrn.com/abstract=2600162 or http://dx.doi.org/10.2139/ssrn.2600162

Benjamin Golez

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Sophie Shive (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

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