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Market Conditions and Fund Flows: Evidence from Hedge Funds

Chou, Wen-Hsiu and Ke, Dongmin and Xu, Danielle (2013) Market Conditions and Fund Flows: Evidence from Hedge Funds. International Journal of Banking and Finance (IJBF), 10 (1). pp. 1-33. ISSN 1675-7227

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This paper investigates whether market conditions affect fund investor behaviour in the hedge fund industry, especially the volatility in the up and down markets. Using a sample of 5,254 individual hedge funds from January 1994 to December 2009, we find that hedge fund investors tend to invest less during up and down-volatile markets.They also adopt different investment strategies in these two market conditions. When market is calm and relatively predictable, there is almost no difference in their behaviors between up and down markets. We also find that smart money effect exists over both 3- and 12-month periods under all market conditions except volatile markets. A further investigation suggests that the observed smart money effect is largely driven by hedge fund performance persistence, which is present and significant is quiet markets only. The findings are relevant to portfolio theories concerning investor recognition of upside and downside volatilities.

Item Type: Article
Uncontrolled Keywords: Hedge funds, flow sensitivities, smart money effect, performance persistence, time-varying performance, downside/upside volatility
Subjects: H Social Sciences > HG Finance
Divisions: UUM Press
Depositing User: Mrs. Norazmilah Yaakub
Date Deposited: 17 Oct 2018 06:48
Last Modified: 17 Oct 2018 06:48
URI: http://repo.uum.edu.my/id/eprint/24979

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