Reference-Dependent Return Chasing: Alpha, Gains and Fund Flows
54 Pages Posted: 3 Nov 2018 Last revised: 15 Aug 2019
Date Written: August 14, 2019
How mutual fund investors chase performance (alpha) with their money is strongly mediated by the nominal price gain or loss that they hold the fund at. For high alpha funds, the investment response to alpha is increased by as much as 50% if the fund is held at a gain as opposed to a loss considering the average dollar invested. The convexity in the relation of fund flows and performance disappears for funds held at a loss. This distinct interaction of alpha and gains operates through buy but not sell decisions. The empirical evidence is consistent with the creation of new investors based on social transmission and information search as mechanism.
Keywords: Performance-Flow Relation, Mutual Funds, Trading Decisions, Social Transmission
JEL Classification: G11, G23, G41
Suggested Citation: Suggested Citation