Determinants of equity mutual fund flows – Evidence from the fund flow dynamics between Hong Kong and global markets

Abstract

This paper identifies major determinants of equity mutual fund flows, which is essential for financial regulators and investors to understand potential sources of instability in domestic financial markets. Using a novel dataset of individual fund data and a fixed-effect quantile panel data regression, we find that fund flows to global equities outweigh other fund-specific factors, suggesting that, other things being equal, mutual funds’ portfolio rebalancing could strongly determine the direction and magnitude of mutual fund flows. Moreover, there are signs that the return-chasing behaviours of fund managers and investors amplify fund flows’ volatility in times of financial turbulence, resulting in a much stronger redemption of equity funds during market downturns. These findings underscore the importance of portfolio diversification and hedging strategies for fund managers and investors of mutual funds to avoid international financial contagion. They also draw an implication for introducing relevant macro-prudential tools to the asset management sector in Hong Kong to maintain financial stability.