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

57 Pages Posted: 23 Mar 2017 Last revised: 28 Oct 2022

See all articles by Juha Joenväärä

Juha Joenväärä

Aalto University School of Business

Cristian Ioan Tiu

University at Buffalo; TIAA Institute

Date Written: October 22, 2022

Abstract

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

Joenvaara, Juha and Tiu, Cristian Ioan, Raising Capital from Not-So-Sophisticated Investors: Hedge Fund Flows to Name Gravitas (October 22, 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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