Fund Flows and Manager Changes as Equilibrium Mechanisms

Abstract

In the previous chapter, the question of whether the existence of short-term persistence but the lack of long-term persistence documented in the literature can be explained by different methodologies applied in these studies has been analyzed. It seems that, even though methodological issues contribute to this observation, persistence indeed decays over longer horizons, even if analyzed with identical methodologies. Consequently, this chapter goes on to further investigate potential reasons for this pattern of performance persistence over time by concentrating on economic explanations for the observed mean reversion in fund performance among both recent winner and recent loser funds. The theoretical grounds have been laid down in chapter 4.