Does performance-chasing behavior matter? International evidence

Jennifer Eunkyeong Lee, Hoon Cho, Doojin Ryu and Sangik Seok

Journal of Multinational Financial Management, 2023, vol. 68, issue C

Abstract: We use funds of hedge funds data from more than 40 countries to analyze how investors’ performance-chasing behaviors affect subsequent fund performance. Fund performance improves when investors are sensitive to past performance. Higher flow-performance sensitivity (FPS) leads to better subsequent performance. A one-standard-deviation increase in FPS is associated with an increase of around 1% per annum in subsequent performance. The positive effect is stronger when fund flows are less affected by market uncertainty, when funds are less prone to decreasing returns to scale, and when funds have shorter share restriction periods. This positive effect varies across regions, and it is most significant in low individualistic countries, suggesting that investors in low individualistic countries can influence fund performance through their response to past performance.

Keywords: Flow-performance sensitivity; Hedge funds; Indirect incentives; International evidence (search for similar items in EconPapers)
JEL-codes: G15 G23 G41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:68:y:2023:i:c:s1042444x2300018x

DOI: 10.1016/j.mulfin.2023.100799

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