Flows, Price Pressure, and Hedge Fund Returns

Katja Ahoniemi, Petri Jylhä

Research output: Contribution to journalArticleScientificpeer-review

Abstract

The authors studied how capital flows affect hedge fund returns and found that funds with high inflows outperform funds with high outflows during the month of the flows. This immediate reaction, combined with feedback trading, gives rise to a cycle: Flows exert price pressure, this effect on returns induces more flows, and these flows cause further price pressure. The cycle is so strong that it takes two years for a full return reversal, and it contributes to the observed persistence in hedge fund performance. The impact of flows on returns has clear implications for performance evaluation: One-third of estimated hedge fund alphas are due to flows.
Original languageEnglish
Pages (from-to)73-93
Number of pages21
JournalFINANCIAL ANALYSTS JOURNAL
Volume70
Issue number5
Publication statusPublished - 2014
MoE publication typeA1 Journal article-refereed

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