This study shows the importance of return discrimination between funds in the flow-performance relationship. To do so, we employ objective-adjusted returns rather than performance ranks. We demonstrate that the net flow-performance relationship is a direct consequence of the convex inflow- and outflow-performance relationships, and that fund size and age have no significant effect on these relationships. When we measure past performance using 12-month objective-adjusted returns, we find a linear net flow-performance relationship after controlling for the investor-substitution effect.

This paper examines the relationship between the increase in fund risk and subsequent cash flows. We attempt to test the hypothesis that an increase in fund risk actually increases the net flows of equity funds, which is a basic assumption of risk shifting. We find that a change in fund risk has a positive and convex relationship with the fund's net flows. The effect of risk changes on net flows is a natural consequence of its effects on inflows and outflows. This paper's empirical results are robust to return frequency, fund age, and fund size. Our findings create incentives for managers to shift risk as documented in the mutual fund literature.