Raising Capital from Not-So-Sophisticated Investors: Hedge Fund Flows to Name Gravitas
55 Pages Posted: 23 Mar 2017 Last revised: 20 Jun 2022
Date Written: April 2, 2022
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: Suggested Citation