Smart Money or Smart about Money? Evidence from Hedge Funds

Ozik, Gideon; Sadka, Ronnie

doi:10.2139/ssrn.1499485

Cited by 11 publications

(11 citation statements)

References 7 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…At that point, the cumulative outperformance returned to the level of the initial flow impact, roughly 2.1%. The result regarding the highly flow-sensitive funds is similar to that of Ozik and Sadka (2010). For the low-flow-sensitivity funds-for which the initial flow impact is markedly smaller-the cumulative relative performance of high-flow minus low-flow funds stayed relatively flat for the first 12 months, after which the high-flow funds began to underperform the low-flow funds.…”

Section: Long-term Flow Impactsupporting

confidence: 53%

“…We argue that the contemporaneous direction of causality runs from flows to returns. First, this is the usual assumption in the literature (see Hasbrouck 1991;Froot, O'Connell, and Seasholes 2001;Ozik and Sadka 2010;Jinjarak, Wongswan, and Zheng 2011). Second, Edelen and Warner (2001) studied daily aggregate mutual fund flows and, using intraday stock index data, established that the positive contemporaneous relation between flows and returns arises because flows cause returns.…”

Section: Contemporaneous Flow Impactmentioning

confidence: 98%

“…Edelen and Warner (2001) also documented a positive relation between aggregate daily mutual fund flows and market returns. For hedge funds, Ozik and Sadka (2010) calculated a fund-level flow-sensitivity measure and found it to be positive on average. However, they did not further pursue the topic of flow impact because their focus was on the existence of smart money among hedge fund investors.…”

Section: Literature Reviewmentioning

confidence: 99%

“…All three differ from ours in that they examined the relation between returns and lagged capital flows whereas we studied the contemporaneous effect. Ozik and Sadka (2010) studied the "smart money" effect and found some evidence of short-term smart money, but the effect was present only for highly flow-sensitive funds. They interpreted this result as evidence of some investors being able to forecast future flows, or being smart about money.…”

Section: Literature Reviewmentioning

confidence: 99%

“…However, when flow-based demand shocks are the main driver behind price pressure, reversal may take much longer. In particular, Coval and Stafford (2007), Ozik and Sadka (2010), Khan et al (2012), and Lou (2012) documented reverting trends in returns for periods ranging from 12 to 36 months following a flow shock. Our result is also reminiscent of the "dumb money" analysis of Frazzini and Lamont (2008), who showed that cumulative raw returns to a high-minus-low strategy based on the past three months of their flow measure clearly begin to drop over a horizon of 6-12 months.…”

Section: Long-term Flow Impactmentioning

confidence: 99%

See 4 more Smart Citations

Flows, Price Pressure, and Hedge Fund Returns

Ahoniemi

Jylhä

2014

Financial Analysts Journal

View full text Add to dashboard Cite

O ver the past two decades, hedge funds have experienced large inflows of capital. The academic literature shows that fund flows result in an uninformed demand shift, which may affect asset prices. In this study, we examined the effect that capital flows have on hedge fund returns. Our results are consistent with a mechanism whereby funds respond to flows by scaling their portfolios up or down, rather than diversifying. These trades have a contemporaneous price impact on the funds' underlying assets, leading to an effect on fund-level returns. Reversal of the initial flow-induced price pressure is delayed by the price impact exerted by further performancechasing flows. Our results are similar to those of Lou (2012), who studied mutual fund flows.The existing literature on uninformed demand shocks has mainly focused on studying equity benchmark index redefinitions (Shleifer 1986;Harris and Gurel 1986;Greenwood 2005) and the flow-driven trading of mutual funds in US equities (Coval and Stafford 2007;Chen, Hanson, Hong, and Stein 2008;Frazzini and Lamont 2008;Greenwood and Thesmar 2011;Khan, Kogan, and Serafeim 2012;Lou 2012). In particular, the latter group of studies examined capital flows in and out of mutual funds and investigated the price impacts of the flows on the stocks held by the funds. Compared with these studies, the use of hedge fund data allowed us to examine the flow-related phenomena with a much broader set of underlying assets and investment strategies, including the use of leverage and derivatives. The fact that our results are consistently present across various types of hedge funds shows that flow-induced price pressure is not limited to only equities. 1 Also, hedge funds are able to hold more illiquid portfolios than mutual funds owing to lockup periods. Further, the sequential nature of flows and returns-monthly flows are submitted before the concurrent return is known, which is not the case for mutual fundsallowed us to quantify the contemporaneous effect that flows have on fund-level returns and hedge fund performance attribution.■ Discussion of findings. We arrived at four key findings. First, hedge fund returns exhibit statistically and economically significant flow-induced price pressure: Funds that received high inflows outperformed funds that experienced large outflows during the month of the flows. Second, over the subsequent months, reversal of the initial price impact occurs relatively slowly: On average, full reversal took around 24 months. Third, flowinduced price pressure contributes to the observed persistence in hedge fund returns. Fourth, and maybe most interestingly from a practitioner's point of view, flows have implications for performance attribution: Estimated hedge fund alphas fell by 33% when controlling for flow impacts. These results contribute to the existing literature on flow-induced price pressure as well as to the hedge fund literature. In the next section, we review the related literature and how our results link to and extend this body of research. Literature R...

show abstract

Section: Long-term Flow Impactsupporting

confidence: 53%

Section: Contemporaneous Flow Impactmentioning

confidence: 98%

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Long-term Flow Impactmentioning

confidence: 99%

See 3 more Smart Citations

Flows, Price Pressure, and Hedge Fund Returns

Ahoniemi

Jylhä

2014

Financial Analysts Journal

View full text Add to dashboard Cite

show abstract

The alpha and omega of fund of hedge fund added value

Darolles

Vaissié

2012

Journal of Banking & Finance

View full text Add to dashboard Cite

The Strategic Listing Decisions of Hedge Funds

Jorion¹,

Schwarz²

2014

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

The voluntary nature of hedge fund database reporting creates strategic listing opportunities for hedge funds. However, little is known about how managers list funds across multiple databases or whether investors are fooled by funds’ listing decisions. In this paper, we find that hedge funds strategically list their small, best-performing funds in multiple outlets immediately while preserving the option to list their other funds in additional databases later. We generally find that investors react rationally to these fund listings based on the predictability of performance. Finally, our results lead to specific guidelines on handling backfilled returns to minimize biases.

show abstract

Smart Money or Smart about Money? Evidence from Hedge Funds

Cited by 11 publications

References 7 publications

Flows, Price Pressure, and Hedge Fund Returns

Flows, Price Pressure, and Hedge Fund Returns

The alpha and omega of fund of hedge fund added value

The Strategic Listing Decisions of Hedge Funds

Contact Info

Product

Resources

About