Raising Capital from Not-So-Sophisticated Investors: Hedge Fund Flows to Name Gravitas
59 Pages Posted: 23 Mar 2017 Last revised: 2 Feb 2023
Date Written: October 22, 2022
We document a clientele effect separating the hedge fund industry. Specifically, some (unsophisticated) hedge fund investors chase funds with salient or persuasive names, a quality we call name gravitas. Flows to name gravitas are economically significant, and the chasing effect is persistent, causal, and robust. Despite their name suggesting investment prowess, the high gravitas funds underperform, fail more often, and are poorer portfolio diversifiers. Skilled funds avoid investors chasing name gravitas by choosing less attractive names. Investors’ salience bias appears sufficiently strong to allow funds with capital raising abilities but little investment skill to coexist with funds skilled at investing.
Keywords: Salience bias, Flows, Behavioral biases, Hedge funds
JEL Classification: G23, G41
Suggested Citation: Suggested Citation