Raising Capital from Not-So-Sophisticated Investors: Hedge Fund Flows to Name Gravitas

55 Pages Posted: 23 Mar 2017 Last revised: 20 Jun 2022

See all articles by Juha Joenväärä

Juha Joenväärä

Aalto University School of Business

Cristian Ioan Tiu

University at Buffalo; TIAA Institute

Date Written: April 2, 2022

Abstract

Most variance in hedge fund names is explained by the only four categories of a psychological dictionary salient to an investor and a fifth category of authority, a combination we call _gravitas_. Owing to some investors’ salience bias, we document an economically significant and causal response of flows to name gravitas. High gravitas funds underperform, trade less actively, and fail more often than low gravitas funds, but they do not exhibit more legal problems. They simply exploit their investors’ behavioral biases to raise capital legally. Documenting performance-independent capital raising challenges the assumption that all hedge fund investors are sophisticated.

Keywords: Salience bias, Flows, Behavioral biases, Hedge funds

JEL Classification: G23, G41

Suggested Citation

Joenvaara, Juha and Tiu, Cristian Ioan, Raising Capital from Not-So-Sophisticated Investors: Hedge Fund Flows to Name Gravitas (April 2, 2022). Available at SSRN: https://ssrn.com/abstract=2939028 or http://dx.doi.org/10.2139/ssrn.2939028

Juha Joenvaara (Contact Author)

Aalto University School of Business ( email )

Finland

Cristian Ioan Tiu

University at Buffalo ( email )

238 Jacobs Management Center
Jacobs Hall, North Campus
Buffalo, NY NY 14260
United States
7166453299 (Phone)

TIAA Institute ( email )

8500 Andrew Carnegie Blvd
E3/S8
Charlotte, NC 28262
United States

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