Money is Smart: New Evidence from Investors’ Buys and Sells

53 Pages Posted: 21 Jul 2016

See all articles by Yeonjeong Ha

Yeonjeong Ha

Pusan National University

Hyeongseok Kang

KAIST College of Business

Tong Suk Kim

KAIST College of Business

Heewoo Park

KAIST College of Business

Date Written: March 31, 2016

Abstract

The existence of a “smart money” effect has been debated since Gruber (1996) and Zheng (1999) suggested investors select mutual funds that subsequently perform well. Using hand-collected data on monthly inflows and outflows, we examine the relation between fund flows and subsequent fund performance in the U.S. mutual fund market. Our results indicate that investors make smart choices when selecting mutual funds. In particular, their money flow into small funds and money flow out of large funds strongly predict future performance. The effects are robust after controlling for a momentum effect. We also show that investors’ fund selection ability exists even in top-performing funds, which means that the smart money effect is separate from investors’ return-chasing behavior.

Keywords: Smart money effect, fund performance, fund inflow, fund outflow

JEL Classification: G10; G11

Suggested Citation

Ha, Yeonjeong and Kang, Hyeongseok and Kim, Tong Suk and Park, Heewoo, Money is Smart: New Evidence from Investors’ Buys and Sells (March 31, 2016). KAIST College of Business Working Paper Series No. 2016-011. Available at SSRN: https://ssrn.com/abstract=2812963 or http://dx.doi.org/10.2139/ssrn.2812963

Yeonjeong Ha

Pusan National University ( email )

mulgeumup beomyeli
Pusan 609-735, 50612
Korea, Republic of (South Korea)

Hyeongseok Kang (Contact Author)

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 130-722
Korea, Republic of (South Korea)

Tong Suk Kim

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 130-722
Korea, Republic of (South Korea)

Heewoo Park

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 130-722
Korea, Republic of (South Korea)

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