What Do Fund Flows Reveal about Asset Pricing Models and Investor Sophistication?

Alpha or beta in the eye of the beholder: What drives hedge fund flows?

Narasimhan Jegadeesh and Chandra Sekhar Mangipudi

The Review of Financial Studies, 2021, vol. 34, issue 1, 108-148

Abstract: Recent evidence indicates that market model alphas are stronger predictors of mutual fund flows than alphas with other models. Some recent papers have interpreted this evidence to mean that CAPM is the best asset pricing model, but some others have interpreted it as evidence against investor sophistication. We evaluate the merits of these mutually exclusive interpretations. We show that no tenable inference about the validity of any asset pricing model can be drawn from this evidence. Rejecting the investor sophistication hypothesis is tenable, but the appropriate benchmark to judge sophistication is different from that used in this literature.

JEL-codes: D81 G11 G12 G4 (search for similar items in EconPapers)
Date: 2021
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