Which Fund Flow?

54 Pages Posted: 30 Oct 2019 Last revised: 24 Jun 2022

See all articles by You Zhou

You Zhou

University of Leeds - Division of Accounting and Finance

Peng Li

University of Leeds - Division of Accounting and Finance

Charlie X. Cai

University of Liverpool Management School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: June 23, 2022

Abstract

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

Zhou, You and Li, Peng and Cai, Charlie Xiaowu and Keasey, Kevin, Which Fund Flow? (June 23, 2022). Available at SSRN: https://ssrn.com/abstract=2839798 or http://dx.doi.org/10.2139/ssrn.2839798

You Zhou

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Peng Li

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Charlie Xiaowu Cai (Contact Author)

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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