Journal
REVIEW OF FINANCIAL STUDIES
Volume 29, Issue 10, Pages 2600-2642Publisher
OXFORD UNIV PRESS INC
DOI: 10.1093/rfs/hhw054
Keywords
G11; G12; G23
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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. (JEL G11, G12, G23)
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