A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money

53 Pages Posted: 21 Dec 2005

See all articles by Guillermo Baquero

Guillermo Baquero

ESMT European School of Management and Technology

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Date Written: November 18, 2005

Abstract

We explore the flow-performance interrelation by explicitly separating the investment and divestment decisions of hedge fund investors. The results show that different determinants and evaluation horizons underlie both decisions. While money inflows are sensitive to past long-run performance, outflows exhibit an immediate and sustained response to past performance in the short run. As a consequence, the shape of the flow-performance relation differs depending on the time horizon being analyzed. We find a weaker flow-performance relation for winning funds at quarterly horizons compared to annual horizons, which may explain why quarterly persistence in hedge fund performance is not competed away. Indeed, we also find evidence that most investors are unable to exploit the persistence of the winners. Conversely, investors are fast and successful in deallocating from the persistent losers, ensuring a disciplining mechanism for lowquality funds. Further, our findings do not support the existence of smart money.

Keywords: Flow-Performance Relation, Fund Monitoring, Hedge Funds, Liquidity Restrictions, Performance Persistence, Searching Costs, Smart Money

Suggested Citation

Baquero, Guillermo and Verbeek, Marno, A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money (November 18, 2005). ERIM Report Series Reference No. ERS-2005-068-F&A. Available at SSRN: https://ssrn.com/abstract=851625

Guillermo Baquero (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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