Which Fund Flow?
54 Pages Posted: 30 Oct 2019 Last revised: 24 Jun 2022
Date Written: June 23, 2022
Using Shapley decomposition, we analyze which alpha drives fund flow and then which alpha-flow predicts future performance. We uncovered two facts that resolve the puzzle of why CAPM is used by fund investors most despite its failure in the stock market. First, investors do not use CAPM-alpha just as a skill measure and chase performance but dynamically switch between the momentum and contrarian uses. Second, the momentum usage dominates explaining why CAPM-alpha seems to be the winner when studying the average fund investors’ use of performance measures. The success of CAPM-alpha is attributed to fund investors’ smart use of CAPM-alpha.
Keywords: mutual-fund flows, risk factors, non-risk factors, smart-money effect, CAPM
JEL Classification: G11, G12
Suggested Citation: Suggested Citation