×

Abstract

The authors studied how capital flows affect hedge fund returns and found that funds with high inflows outperform funds with high outflows during the month of the flows. This immediate reaction, combined with feedback trading, gives rise to a cycle: Flows exert price pressure, this effect on returns induces more flows, and these flows cause further price pressure. The cycle is so strong that it takes two years for a full return reversal, and it contributes to the observed persistence in hedge fund performance. The impact of flows on returns has clear implications for performance evaluation: One-third of estimated hedge fund alphas are due to flows.

About the Author(s)

Katja Ahoniemi
Petri Jylhä

We’re using cookies, but you can turn them off in Privacy Settings. If you use the site without changing settings, you are agreeing to our use of cookies. Learn more in our Privacy Policy.