Review of Financial Studies Vol. 29 No. 10 2016

Which Factors Matter to Investors? Evidence from Mutual Fund Flows

Brad M. Barber¹; Xing Huang²; Terrance Odean³

¹ University of California, Davis · ² Michigan State University · ³ University of California, Berkeley

Abstract

When assessing a fund manager's skill, sophisticated investors will consider all factors (priced and unpriced) that explain cross-sectional variation in fund performance. We investigate which factors investors attend to by analyzing mutual fund flows as a function of recent returns decomposed into alpha and factor-related returns. Surprisingly, investors attend most to market risk (beta) when evaluating funds and treat returns attributable to size, value, momentum, and industry factors as alpha. Using proxies for investor sophistication (wealth, distribution channels, and periods of high investor sentiment), we find that more sophisticated investors use more sophisticated benchmarks when evaluating fund performance.

DOI

10.1093/rfs/hhw054

Volume

29

Issue

10

Pages

2600-2642

Language

en

Sources

openalex crossref