How Do Bond Investors Measure Performance? Evidence from Mutual Fund Flows

53 Pages Posted: 12 Dec 2019

See all articles by Thuy Duong Dang

Thuy Duong Dang

Leibniz Universität Hannover

Fabian Hollstein

Leibniz University Hannover - School of Economics and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: October 25, 2019

Abstract

Which factor model do investors in corporate bonds use? We examine this question by tracking investors’ decisions to invest in actively managed corporate bond mutual funds with a revealed preference approach. Our main result is that all bond factor models are dominated by the simple Sharpe ratio. For all major corporate bond mutual fund styles, the Sharpe ratio explains fund flows better than alphas from bond factor models. Since the Sharpe ratio can be easily manipulated in bond markets, our findings have potentially severe implications for fund mangers as well as active traders and buy-and-hold corporate bond mutual fund investors.

Keywords: bond factor models, Sharpe ratio, bond mutual funds, investor flows, performance evaluation, flow-performance sensitivity

JEL Classification: G12, G11

Suggested Citation

Dang, Thuy Duong and Hollstein, Fabian and Prokopczuk, Marcel, How Do Bond Investors Measure Performance? Evidence from Mutual Fund Flows (October 25, 2019). Available at SSRN: https://ssrn.com/abstract=3486351 or http://dx.doi.org/10.2139/ssrn.3486351

Thuy Duong Dang (Contact Author)

Leibniz Universität Hannover

Königworther Platz 1
Hannover, 30167
Germany

Fabian Hollstein

Leibniz University Hannover - School of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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