Abstract
This study presents a simple dynamic model of capital flows and returns. Using weekly data from nine global property funds, the results show that previous capital flows and returns affect the current capital flows. Furthermore, there is supporting evidence to show that previous capital flows impact on performance, which is consistent with the price-pressure effect, and liquidity effect. When facing substantial capital outflows, a portfolio would tend to depress as it approaches its liquidity limit to the point that fund managers have to sell off some stocks in their optimal portfolio, thereby affecting the overall fund performance. The overall results lends support to the smart money hypothesis in that global property fund investors tend to make strategic investment decisions rather than following market sentiment or return chasing behavior alone.
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