Essays on mutual funds and hedge funds

Abstract

This paper conducts an empirical analysis of mutual funds and hedge funds. The first study examines how flow-performance sensitivity affects future performance. We find that higher sensitivity leads to better fund performance. In particular, the results are more evident when fund flows are less affected by market uncertainties, when fund performance decreases less as fund size increases, and when the redemption restriction period is shorter. We also find that the relationship is more prominent in countries with low individualism. The second study looks at how flow-performance sensitivity changes before and after the Madoff scandal and reconfirms that flow-performance sensitivity has a positive effect on future performance. After the scandal, investors begin to value fund reliability rather than fund performance, and the flow-performance sensitivity of funds of hedge funds with short management periods and with small fund sizes decreases more than that of other funds of hedge funds. These young and small funds of hedge funds present significantly lower performance than others. In the third study, we examine what is the primary channel of distributor-level competition among mutual funds. Within the same distributor, funds with better quality are sold more than funds with high sales commissions. Also, funds sold through affiliates show “dumb money” effect.