Money is Smart: New Evidence from Investors’ Buys and Sells
53 Pages Posted: 21 Jul 2016
Date Written: March 31, 2016
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: Suggested Citation