Can Mutual Fund Investors Distinguish Good from Bad Managers?

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Abstract

Mutual fund flows respond significantly to the return gap of Kacperczyk et al. (2008), which captures information about unobserved actions of mutual funds and predicts future performance. The sensitivity of fund flows to the return gap is: 1) strong and positive; 2) increasing with investor sophistication; 3) highly non-linear; and 4) decreasing with the informativeness of past fund returns. On average, the response of investors to the return gap enhances their performance. Our findings suggest there is a sophisticated mass of investors who can distinguish good from bad managers using information that may not be directly inferred from standard performance indicators.
Original languageEnglish
Pages (from-to)505-540
Number of pages36
JournalInternational Review of Finance
Volume19
Issue number3
DOIs
Publication statusPublished - 25 Mar 2018

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