Abstract
Common flow factors explain significant fractions of annual and quarterly flows to US mutual funds. Common flow factors are highly autocorrelated and are correlated with financial market yields, macroeconomic variables, investor confidence and market volatility at various leads and lags. The systematic components of flows differ across funds according to funds’ “flow betas.” Equity fund flow betas depend on past performance and fund characteristics, such as size, age and expense ratios. High flow beta funds offer significantly lower subsequent returns. Decomposing mutual fund flows into common and idiosyncratic components also generates new insights about the “flow-performance” relation in equity funds first observed by Ippolito (1992) and the “smart money” effect in fund flows first documented by Gruber (1996).
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