Smart Money and Small Funds

Abstract

This study extends the literature on the relationship between recent performance and the movement of managed funds’ assets by investigating the effects of fund size and age. The results confirm a size effect, as well as an age effect. Tests distinguishing between the two favor a size rather than an age interpretation. The evidence that flows of small funds are more sensitive to recent performance than flows of large funds is consistent with Gruber’s (1996) notion of sophisticated investors using information in past performance to identify superior funds. Zheng’s (1998) evidence that the good performers tend to be small funds suggests that the smart money should be following small funds, as confirmed in this study. Support for the ‘smart money size effect’ is also provided here with evidence confirming that small funds tend to be superior performers.

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