Smart Money, Dumb Money, and Equity Return Anomalies

Abstract

We investigate the dual notions that “dumb money” exacerbates well-known stock return anomalies, and “smart money” attenuates these anomalies. We find that aggregate flows to mutual funds (“dumb money”) appear to exacerbate cross-sectional mispricing, particularly for growth, accrual, and momentum anomalies. In contrast, hedge fund flows (“smart money”) appear to attenuate aggregate mispricing. Our results suggest that aggregate flows to mutual funds may have real adverse allocation effects in the stock market, while aggregate flows to hedge funds contribute to the correction of cross-sectional mispricing.