Aggregate Hedge Fund Flows and Asset Returns

Abstract

Although several papers study the pattern of cash flows into individual hedge funds to examine how investors choose among different funds, little is known at the macro level about how hedge fund investors as a group respond to aggregate fund returns and market wide price movements. This paper analyzes the pattern in quarterly aggregate flows into the hedge fund sector from 1994 to 2007. We document several main results. First, we find a significant and positive relation between aggregate flows and past aggregate hedge fund returns, indicating that hedge fund investors as a group chase past aggregate performance. Second, we report a significant and positive relation between aggregate flows and contemporaneous aggregate hedge fund returns. Third, we find marginal evidence on a negative relation between aggregate fund flows and subsequent hedge fund returns, suggesting that hedge fund investors as a group are unable to successfully time hedge fund returns. We also find that investors put money into the hedge fund sector following high stock market returns and low returns on Treasury bills, while stock and bond market returns are not related to past aggregate hedge fund flows.