Learning About Mutual Fund Managers

DARWIN CHOI, BIGE KAHRAMAN, and ABHIROOP MUKHERJEE∗

ABSTRACT

We study capital allocations to managers with two mutual funds, and show that
investors learn about managers from their performance records. Flows into a fund
are predicted by the manager’s performance in his other fund, especially when he
outperforms and when signals from the other fund are more useful. In equilibrium,
capital should be allocated such that there is no cross-fund predictability. However,
we find positive predictability, particularly among underperforming funds. Our results
indicate incomplete learning: while investors move capital in the right direction, they
do not withdraw enough capital when the manager underperforms in his other fund.

∗
Darwin Choi and Abhiroop Mukherjee are at Hong Kong University of Science and Technology, and
Bige Kahraman is at Saı̈d Business School, University of Oxford. We thank Kenneth Singleton (the editor),
an associate editor, and two anonymous referees for many helpful suggestions. We are also grateful for com-
ments received from Tim Adam, Vikas Agarwal, Nicholas Barberis, Jonathan Berk, Utpal Bhattacharya,
Lauren Cohen, Magnus Dahlquist, Francesco Franzoni, Mariassunta Giannetti, William Goetzmann, Luis
Goncalves-Pinto, Jennifer Huang, Marcin Kacperczyk, Raymond Kan, Dong Lou, Kasper Nielsen, Lubos Pas-
tor, Jonathan Reuter, Mark Seasholes, Paolo Sodini, Laura Starks, Per Stromberg, Mandy Tham, Heather
Tookes, Michaela Verardo, Baolian Wang, Mitch Warachka, Russ Wermers, Youchang Wu, Tong Yao, Hong
Zhang, Lu Zheng, and seminar participants at American Finance Association Annual Meeting 2014, Roth-
schild Caesarea Center 11th Annual Conference 2014, China International Conference in Finance 2013,
Recent Advances in Mutual Fund Research 2013, Seventh Singapore International Conference on Finance
2013, Auckland Finance Meeting 2012, HKUST Finance Symposium 2012, Seventh Annual Early Career
Women in Finance Conference 2012, Curtin University, HKUST, London School of Economics, Shanghai
Advanced Institute of Finance, SIFR/Stockholm School of Economics, and University of Western Australia.
We acknowledge the General Research Fund of the Research Grants Council of Hong Kong (Project Number:
640610) for financial support. All errors are our own.
Mutual funds are important investment vehicles for many households. While previous studies
show that investors infer funds’ ability to generate excess future returns from past returns
and allocate their capital accordingly (Sirri and Tufano (1998); Huang, Wei, and Yan (2007,
2012); Franzoni and Schmalz (2015)), some attribute the performance-chasing behavior to
behavioral biases (Frazzini and Lamont (2008); Bailey, Kumar, and Ng (2010)).1 In this
paper, we provide evidence that investors learn about their mutual fund managers in a
sophisticated manner. Learning about managers is particularly value-relevant, as recent
empirical studies document large differences among managers in terms of skill.2 Our paper
studies managers who manage two mutual funds, and examines whether investors learn about
managerial ability from past performance in the other fund managed by the same person.
Moreover, we ask an important follow-up question: is such learning behavior, as is typically
assumed in theoretical models, complete? Our analysis contributes to the debate on the
rationality of investors’ behavior.

We first extend Berk and Green’s (2004) model to a setting with two funds per manager,
and derive empirical tests for the flow-performance relationship under fully rational and
frictionless conditions. We find that flows indeed respond to the other fund’s past perfor-
mance in the data, and in ways that are consistent with our model predictions on learning.
Instead of simply suggesting that investors are learning rationally in a frictionless market,
we take a further step and examine whether the response in flows is “sufficient.” A superior
past performance in one fund signals positive managerial ability. If flows drive down fund
performance due to decreasing returns to scale, sophisticated investors should allocate more
capital into the manager’s other fund, up to the point that it earns zero expected return in
the future.3 A similar argument applies if one of the manager’s funds performs poorly. This
null hypothesis of no cross-fund predictability, which mirrors Berk and Green’s (2004) equi-
librium, indicates sufficient allocation. However, if investors do not move enough capital into
and out of a fund given the other fund’s performance, there would be positive predictability,
while negative predictability could arise if investors move too much capital in response to
signals.
1
Elton, Gruber, and Busse (2004) and Choi, Laibson, and Madrian (2010) find that some mutual fund
investors are unable to make the right choice in the simplest possible context, questioning whether investors
have the required level of sophistication.
2
Skill seems to be related to managerial characteristics such as education (Chevalier and Ellison (1999a)),
past experience (Pool, Stoffman, and Yonker (2012); Kempf, Manconi, and Spalt (2014)), and social networks
(Cohen, Frazzini, and Malloy (2008); Pool, Stoffman, and Yonker (2014)). Using novel measures of ability,
several papers find that some fund managers are better than others (e.g., Kacperczyk and Seru (2007);
Kacperczyk, Sialm, and Zheng (2008); Cremers and Petajisto (2009); Baker et al. (2010)).
3
As argued by Berk and Green (2004), Chen et al. (2004), and Yan (2008), fund size may erode per-
formance because managers of larger funds spread their information-gathering activities too thin, and large
trades have higher price impact and execution costs.

1
 Our main results are summarized as follows. We find that flows into a fund are predicted
by past performance in both of the manager’s funds. In a linear flow-performance regression,
which includes past four-factor alphas of both funds as independent variables, the sensitivity
to the other fund’s performance is about 17% of the sensitivity to the fund’s performance
itself. This result is not explained by the fact that the two funds come from the same family.
We control for family fixed effects and the presence of a star fund, which can create spillover
flows to other funds in the family (Nanda, Wang, and Zheng (2004)). Moreover, consistent
with our model’s predictions, flows respond more to the other fund and less to the fund itself
when the two funds are more similar in style or when the fund has more volatile returns.
Flows also respond less when the manager has been managing the funds longer. All these
suggest that investors are drawing inferences about managerial ability from past returns of
both funds. Through a piecewise-linear regression framework, we further show that the effect
of the other fund is more prominent when its performance has been exceptionally good.

From the performance predictability tests, we find positive cross-fund predictability,

which indicates that investors do not respond enough to the manager’s performance in his
other fund. We sort all two-fund managers into portfolios based on past performance in one
of their funds. Managers’ future performance in their other funds is examined, with various
holding periods. Our tests show that a manager’s past performance in one fund predicts
future performance in his other fund, a result that is also confirmed by using a double sort
or running a regression, both of which control for past performance in the fund itself. Such
predictability is unlikely to be due to price pressure, as it does not reverse in the long run
(in contrast to the own-fund case; Lou (2012)), and it is not driven by cases where the two
funds’ portfolios have a high overlap. It comes mostly from underperforming multi-fund
managers, suggesting that investors do not withdraw enough money from a fund when the
other fund underperforms. This finding is consistent with our previous result that investor
flows respond more to the manager’s performance in his other fund when it is better.

Although other studies have examined the flow-performance relationship and return pre-
dictability in mutual funds, using two funds from the same manager offers some unique
advantages. First, we provide new evidence on performance-chasing behavior, which may
be rational or related to behavioral biases. As predicted by our model, we find that flows
respond more to past performance in the other fund when the signal is more precise and
relevant, indicating that investors learn in a sophisticated manner. Second, we are able to
identify investor learning at the manager level. Previous studies conducting fund level anal-
yses typically cannot distinguish between information about the fund and its management.
Our paper contains two sets of “placebo” samples to single out the effect of managers. In

2
one sample, we use the same two funds in a period when they are managed by different man-
agers, while in the other sample, we replace one of the manager’s funds with another fund
in the same fund family or that has similar characteristics, but is not managed by the same
manager. Our main results are not observed in these placebos. Third, our research design
allows us to control for the impact of flow-driven price pressure on performance persistence,
and explore the role of investor learning. There is some return persistence in mutual funds
(Carhart (1997)), but own-fund return persistence is partly attributed to price pressure aris-
ing from fund flows.4 Funds facing outflows liquidate their positions that are concentrated
in losing stocks and drive down future stock returns as well as fund returns (Lou (2012)).
Using two funds from the same manager, we are able to control for past returns in the own
fund, which is an important driver of flow-driven price pressure. We are also able to measure
the similarity between the two funds’ portfolios, and thus control for the role of overlapping
positions leading to cross-fund predictability.

Our paper contributes to the understanding of mutual fund investor learning. We con-
clude that investors are generally sophisticated – perhaps surprisingly sophisticated in light
of papers that suggest otherwise – and are responding in the correct direction. However,
capital flows do not respond enough to a manager’s overall performance. Our model pro-
vides a framework that is similar to Berk and Green (2004) to understand rational learning
about managers who manage two funds, and is only partially supported by the data. We
also present a simple extension of the model, which allows for frictions. Three possible types
of frictions are discussed: (i) institutional frictions (such as loads), (ii) costly information
acquisition, and (iii) investors’ underweighting new information on their manager. We show
evidence that the first channel is not the only driving mechanism, while channels (ii) and (iii)
result in investors’ overweighting on priors and can potentially explain our overall findings.

This paper complements other studies on cross-fund learning. Cohen, Coval, and Pastor
(2005) propose a performance measure based on the historical returns and holdings of many
other funds; however, flows do not seem to respond to their measure, perhaps because
aggregating all the information across funds is too complex for a typical investor.5 Using the
4
Carhart (1997) documents some persistence in performance, especially among underperforming funds,
but the driving forces are not well understood. To explain the continued investment in the poor performers,
some authors discuss the role of biases in investor information sets or search frictions (e.g., Gruber (1996);
Goetzmann and Peles (1997)), while an alternative view relates persistence in poor performance to flow-
driven price pressure (e.g., Lou (2012)). Prior research has not been able to provide conclusive evidence.
5
Information on managers, including other funds they manage, is easily accessible to investors via in-
vestment resources such as Morningstar. See, for example, http://financials.morningstar.com/fund/
management.html?t=JARTX&region=USA&culture=en-US. Also, some fund managers can get a considerable
amount of media coverage, especially following good performance (Chevalier and Ellison (1999b); Ding and
Wermers (2012)).

3
variability in fund alphas, Jones and Shanken (2005) generate a precision-weighted average
measure of fund performance that seems to have some effects on capital allocation. A
contemporaneous paper by Brown and Wu (2015) develops a model of optimal cross-fund
learning within fund families and tests the impact of family performance on flows. They
argue that there are two opposite impacts: a positive common skill effect and a negative
correlated noise effect, and that the first effect typically dominates. While our results on the
flow-performance relationship are generally consistent with Brown and Wu’s (2015) model,
our focus is on cases where two funds are managed by the same person. We find that manager
skill is important and is different from family-specific or industry-wide information – more
specifically, common management seems to be the main source of “common skill” effect
within fund families. Another major distinction between our paper and other studies is that
we also examine the magnitude of the response: we complement prior literature by showing
that although the response in flows is in the right direction, it is not always sufficient. We
therefore offer a conclusion that is different from prior studies. Brown and Wu (2015), for
example, do not examine predictability and present no evidence suggesting anything other
than a fully rational and frictionless world.

Other related papers include Franzoni and Schmalz (2015), who model and test Bayesian
investors’ learning behavior under uncertainty about funds’ risk loadings, showing that flows
are more sensitive to performance when market returns are moderate than when market
returns are very high or low; Huang, Wei, and Yan (2012), who show that flow-performance
sensitivity is weaker for funds with more volatile past performance and longer track records;
Yadav (2010) and Agarwal, Ma, and Mullally (2015), who also look at multi-fund managers,
but study managers’ incentives and the determinants of multitasking.

The remainder of this paper is structured as follows. Section I extends Berk and Green’s
(2004) model to a two-fund manager setting and derives the empirical predictions, as well as
discusses potential reasons for insufficient capital allocation. Section II describes our sample.
Sections III and IV present, respectively, the results regarding our two central hypotheses:
performance-chasing and predictability. Section V concludes. The Appendix contains proofs
and a simple extension to the model.

4
 I. A Model of Managers With Two Funds

A. The Cross-Fund Flow-Performance Relationship

We extend Berk and Green’s (2004) fully rational expectations model to accommodate
the context of each fund manager managing two funds simultaneously. Managers differ in
their ability to generate returns in excess of a passive benchmark, and investors observe past
returns of the two funds and attempt to infer their manager’s ability. A manager’s excess
returns over the benchmark, before fees, for his Funds 1 and 2 at time t are given by:

   
R1t ψ1 + 1t
Rt ≡ = ; (1)
R2t ψ2 + 2t
where ψi s, funds’ expected excess returns, are partly fund-specific and partly manager-
specific; that is, a manager can generate excess returns, but not necessarily by the same
amount in the two funds (ψ1 generally does not equal ψ2 ).6 While we do not model the source
of these excess returns, we believe that managers could possess stock-picking and market-
timing ability (Berk and Green (2004); Mamaysky, Spiegel, and Zhang (2008); Kacperczyk,
van Nieuwerburgh, and Veldkamp (2014)) and that part of the two funds’ excess returns
is attributable to the manager. Throughout the paper, we define the unobserved ability
to generate expected (gross) returns in excess of a passive benchmark in the two funds as
manager skill. It refers to the abnormal gross return investors can earn from their perspective,
as in Berk and Green (2004) and Pastor, Stambaugh, and Taylor (2015).7 The idiosyncratic
errors, it s, are normally distributed with mean zero, and can be diversified away by investing
in many different funds. We assume that 1t and 2t are uncorrelated.8

Denote the size of Fund i (i = 1, 2) at time t as qit , and the costs of management as C(qit ),
which is a function of size. Assume managers earn a fixed management fee, f , expressed as
a fraction of the fund size.9 The excess total payout to investors of fund i, net of fees and
6
We model ψi s as partly fund-specific and partly manager-specific for parsimony. The model is robust
to an alternative specification in which fund-specific excess returns and manager-specific excess returns are
separate parameters.
7
Our definition of skill is different from, for example, Berk and van Binsbergen (2014), who argue that
manager skill should be assessed by the value his fund extracts from markets. Their measure of value added
of the fund is gross return over its benchmark multiplied by total assets under management. It is a measure
in dollars taking into account the total value extracted from investors through fees, while our focus is how
investors make their capital allocations based on their perceived return.
8
Brown and Wu (2015) allow idiosyncratic shocks to be positive correlated. To keep the model simple,
we abstract from this correlated noise effect.
9
In a more complicated model, fees can be endogenous. We keep our model simple by abstracting from
managerial fee-related issues. Also, although we discuss some possible reasons for the existence of multi-fund

5
costs, at time t + 1 is
T Pi,t+1 = qit Ri,t+1 − C(qit ) − qit f. (2)

As in Berk and Green (2004), the costs of management are increasing and convex (C  (q) > 0
and C  (q) > 0) as funds face decreasing returns to scale. They argue that decreasing returns
to scale arise because, for a larger fund, trades might be associated with a higher price impact
or execution costs, and the information-gathering activities might be spread thinner. For
simplicity, we assume that there are no cost externalities from one fund to another (i.e., for
Fund 1, C(q1t ) only depends on q1t but does not depend on q2t , and vice versa). The excess
net return to investors of fund i is therefore equal to

T Pi,t+1
ri,t+1 = = Ri,t+1 − c(qit );
qit
 
c(q1t )
i.e., rt+1 = Rt+1 − . (3)
c(q2t )

C(qit )
where c(qit ) ≡ qit
+ f , is the unit cost associated with investing in Fund i at time t.

Investors are Bayesians and observe historical returns Rt (which they infer from excess net
return rt in equation (3)) from t = 1, . . . , T . The returns Rt are drawn from a multivariate
 
normal distribution with unknown mean μ = ψψ12 (from equation (1)) and known variance-
 
covariance matrix Ω = V01 V02 . That is,
 
ψ1
Rt ∼ N ( ; Ω). (4)
ψ2

Let investors’ priors on ψi s at time 0 be

 
ψ10
∼ N (μ0 ; Σ0 ), (5)
ψ20
 W1 W12 
where Σ0 ≡ W 12 W2
. W12 captures the covariance between ψ10 and ψ20 . This represents
investors’ beliefs on how much the manager’s ability can be carried from one fund to the
other. We define the following precision matrices: S ≡ Ω−1 and P0 ≡ Σ0 −1 .

In the absence of frictions, investors should invest more money into funds that earn
positive expected excess net returns (in the next period), and withdraw from funds that
managers in Section II, the model is silent on how managers are assigned to funds. The current setting refers
to situations where investors start learning about the manager after he begins to manage two funds.

6
earn negative expected excess net returns. Given that there are decreasing returns to scale,
investors competitively allocate capital to funds, up to the point that all funds earn zero
expected excess net returns (as in Berk and Green’s (2004) equilibrium). Therefore, from
the investor’s perspective, which is conditioned on the information set available at time T ,

ET [ri,T +1 ] = 0, (6)

for all managers and all funds. In our fully rational and frictionless baseline model in this
section, the conditioning information at time T is complete and the probability measures
of investors are rational. This learning environment is the same as that in Berk and Green
(2004). Appendix B presents an extension where the investor’s expectation operator is
different from the “true” expectation operator.

From equation (3), this means

 
c(q1T )
ET [RT +1 ] = . (7)
c(q2T )

Denote investors’ expected excess gross fund returns, given information at time T , as μT .
We have  
c(q1T )
μT ≡ ET [RT +1 ] = . (8)
c(q2T )
 
Now we specify the process by which investors update their beliefs on ψψ12 , the two funds’
ability to beat the benchmark (recall that the ability is partly due to the manager). From
 
equations (4) and (5), both the signal Rt and the prior ψψ1020
follow a multivariate normal
distribution. Applying Theorem 1 from DeGroot (2004, p.175), the mean of the posterior
distribution of the manager’s ability to beat the benchmark at time T is given by

μT = [P0 + T S]−1 [P0 μ0 + T SRT ], (9)

where RT is the arithmetic mean of R1 , R2 , . . . , RT . This updating rule states that the
posterior mean depends on the mean of the priors at time 0, the precisions of the signals
and the priors, the number of periods, and the average excess gross return. This Bayesian
updating yields the following equation (see Appendix A for the derivation):

μT = μT −1 + [P0 + T S]−1 SrT . (10)

In equilibrium, the posterior mean depends on the mean at time T − 1, the precisions of the

7
signals and the priors, the number of periods, and the excess net return at time T . When the
excess net return is positive (negative), the posterior mean is revised upward (downward)
from the mean at time T − 1.

We are interested in investors’ flows into and out of Funds 1 and 2. In our context, we
examine the change in the size of the funds, qiT − qi,T −1 . Since the unit cost function c is
monotonically increasing in qit , it suffices to look at the change in the unit cost, c(qiT ) −
c(qi,T −1 ).10 From equations (8) and (10),
 
c(q1T ) − c(q1,T −1 )
= μT − μT −1 = [P0 + T S]−1 SrT (11)
c(q2T ) − c(q2,T −1 )

We derive in Appendix A the following equation for Fund 1:

c(q1T ) − c(q1,T −1 ) = A1 r1T + A2 r2T ; (12)

Td
d W1 + V2
where A1 = ;
Δ V1
d W12
A2 = ;
Δ V2
2
d = W1 W2 − W12 ;
T 2 d2 W 1 W2
Δ=d+ + T d( + ).
V1 V2 V1 V2

We formally introduce a proposition about the flow-performance relationship, as cap-

tured by A1 and A2 , the coefficients of excess net returns in equation (12).11 Proofs of all
propositions are presented in Appendix A.

PROPOSITION 1: Flows are always increasing in the fund’s past excess return; flows are
increasing in the other fund’s past excess return, as long as W12 is positive.
10
For a formal proof that c (q) > 0, see Berk and Green (2004, p.1276). The interested reader can also
see Berk and Green (2004) for specifying a cost function and expressing the equation in terms of percentage
flow.
11
In both the model and the empirical tests, we examine the flow-performance relationship at the fund
level. We only require investors of Fund 1 to take into account Fund 2’s past performance when they decide
how much to invest in Fund 1, and it is not necessary that every investor of Fund 1 should also invest in
Fund 2. Furthermore, an investor of Fund 1 can buy Fund 1 at any time, that is, he does not have to wait
for Fund 2 to be created or assigned to the manager. In other words, Funds 1 and 2 may have different
clienteles; however, our fund-level data do not allow us to examine them more closely.

8
 Intuitively, flows chase past performance in the fund, as it signals the fund’s ability
to beat the benchmark. If managerial skill carries over from one fund to another (W12
is positive), then good past performance in the other fund is also a positive signal of the
manager’s ability, and flows chase past performance in the other fund as well. W12 can also
tell us about the relative size of the two coefficients, A1 and A2 . If the following condition is
W1 + T d
satisfied, V1 V2 > WV12 2
, then A1 > A2 . In other words, if W12 is below a certain threshold,
then investors respond more strongly to the fund’s past performance than to the other fund’s,
as the latter is less relevant. We discuss the relative size of these coefficients in Section III.A.

B. Cross-Sectional Predictions

In this section, we develop a few more testable hypotheses by examining how A1 and
A2 change with some parameters in the model. These help us understand when the flow-
performance relationship should be stronger in the cross-section of managers.

PROPOSITION 2: If W12 is higher, then flows respond more to the other fund’s past excess
return, and less to the own fund’s past excess return.

This means that when skill is less transferable across funds (W12 is lower), the other
fund’s performance becomes less relevant, and investors naturally have to depend more on
the fund itself to infer their future prospects. If skill is more transferable across funds, then
the coefficients go in opposite directions.

PROPOSITION 3: If the signal from the own fund return is noisier, then flows respond
more to the other fund’s past excess return, and less to the own fund’s past excess return. If
the signal from the other fund return is noisier, then flows respond more to the own fund’s
past excess return, and less to the other fund’s past excess return.

A higher volatility makes investors less certain that a positive excess return is due to
skill, and therefore investors rationally put a lower weight on more volatile fund returns. As
before, a similar logic applies: the reduced relevance of one signal makes investors depend
more on the other, ceteris paribus.

PROPOSITION 4: If the manager has been managing the two funds for a longer time period,
then flows respond less to both the own fund’s past excess and the other fund’s past excess
returns.

9
 Finally, if T is larger (the manager has been managing the two funds for longer), then
investors have already learned more about the manager’s ability using the past signals, and
react less to the most recent excess returns of the two funds.

These predictions are unlikely to be explained by some types of crude trend-chasing

behavior, under which we expect investors to simply chase past returns in both funds (sen-
sitivities do not vary with the parameters). We will test the Propositions in Section III.

C. Extension: Frictions in Capital Allocation

In the baseline model, we present a fully rational and frictionless equilibrium that is
similar to Berk and Green (2004). Note that the equilibrium condition in the model implies
that the manager’s two funds should earn zero expected excess net return from the investor’s
perspective (equation (6)). In Appendix B, we extend our model to account for frictions.

Specifically, we describe three possible channels: institutional, informational, and behav-

ioral frictions. First, in the presence of transactions costs such as front-end and back-end
loads imposed by institutions, investors may choose to not react to new signals because they
find it more costly to move capital across different funds. Second, information (fund perfor-
mance) may not be accessible to investors at zero cost. The cost of acquiring information
can be the time and effort cost of finding out how funds have performed, or “observation
costs” as in Duffie and Sun (1990), Gabaix and Laibson (2005), Abel, Eberly, and Panageas
(2007), and Alvarez, Guiso, and Lippi (2012). As a result, investors would not be able to ob-
tain new information on a continuous basis. Finally, investors may suffer from conservatism
(Edwards (1968); Barberis, Shleifer, and Vishny (1998)) and psychologically rely too much
on priors. All these channels might make investors place too much weight on priors and too
little weight on new information, relative to a Bayesian operating in a frictionless world (our
baseline model).

To model this, we start from equation (10),

μT = μT −1 + [P0 + T S]−1 S[RT − μT −1 ] , from equations (3) and (8)

= {I − [P0 + T S]−1 S}μT −1 + [P0 + T S]−1 SRT
= {I − M }μT −1 + M RT , (13)

where M = [P0 + T S]−1 S. If investors overweight priors and underweight new information,

10
we can modify equation (13) to reflect this:

μIT = {I − kM }μIT −1 + kM RT , (14)

where μIT is the expected gross fund returns under investors’ beliefs and information, and
0 < k < 1.12

Our extension in Appendix B demonstrates that if investors use equation (14) to update
their beliefs, then flows into a fund will be less responsive to the other fund’s past excess
return. As a result, excess return of one fund will positively predict the other fund’s expected
future performance, unlike in the rational and frictionless equilibrium. However, the model
extension demonstrates that cross-sectional predictions from our baseline model remain valid,
even in the presence of frictions.

From the modeling perspective, we do not distinguish between the three types of fric-
tions. Brav and Heaton (2002) show that a learning model with behavioral biases (such as
conservatism) looks mathematically very similar to a learning model with incomplete infor-
mation, which makes it hard to distinguish between the two. We investigate the empirical
evidence regarding frictions in Section IV.C.

II. Data Sources and Sample

We primarily use the Center for Research in Security Prices (CRSP) Survivorship Bias
Free Mutual Fund Database. The CRSP mutual fund database includes information on
fund returns, total net assets (TNA), fees, and other fund characteristics including man-
agers’ names. While managers’ names are provided by CRSP, a large panel of multi-fund
managers is not readily available. This is because the names are not recorded consistently
across time and funds: first and middle names are sometimes abbreviated differently and
are sometimes excluded. We track all managers carefully and hand-construct our database
of multi-fund managers, taking into account spelling differences and format changes, similar
to, for example, Kacperzyk and Seru (2007). Sometimes the names do not match perfectly:
we apply our best judgment by first, looking up publicly available information on funds from
the Internet, and, if this information is not available, by estimating how common the names
12
The model can also accommodate underweighting of priors and overweighting of new information, if we
allow k > 1. The remainder of the analysis will be analogous, so we focus on k < 1 for clarity and simplicity.
Ultimately, whether our data is more consistent with 0 < k < 1 or k > 1 is empirically testable, as we show
in Section IV.

11
are (e.g., common last names are more likely to refer to different people). We analyze all
names that are available in CRSP and drop funds with missing managers’ names. From the
CRSP data we are able to identify 9,596 distinct managers.

We focus on funds that are managed by a single person who manages more than one
fund (we call these managers “multi-fund managers”). The reasons for our exclusion of funds
managed by two or more people is that team-managed and solo-managed funds have different
organizational structures (Chen et al. (2004)), and we do not know how the responsibilities
are divided among team managers. Following Agarwal, Ma, and Mullally (2015), we also
exclude cases where a manager runs more than four funds, as these managers are likely to
be team managers.

To be consistent with other recent papers in the literature, our analysis uses a subset
of funds in the CRSP database. We examine funds with investment objectives of growth
and income, growth, and aggressive growth. The objectives are identified by the investment
objective codes from the Thomson-Reuters Mutual Fund Holdings database.13 We only
include funds that have more than half of their assets invested in common stocks. Finally,
we exclude index funds (funds that are identified by CRSP as index funds or funds that
have the word “index” in their reported fund names), as well as funds that are closed to new
investors.

During our sample period, many funds have multiple class shares. Since each class share
of a fund has the same portfolio holdings, we aggregate all the observations to the fund
level, following Kacperczyk, Sialm, and Zheng (2008). For qualitative attributes such as
objectives and year of origination, we use the observation of the oldest class. For the TNA
under management, we sum the TNAs of all share classes. We take the lagged TNA-weighted
average for the rest of the quantitative attributes (e.g., returns, alphas, and expenses).

Data on managers’ names from CRSP are available starting in 1992.14 Our sample
13
We link CRSP and Thomson-Reuters data using the Mutual Fund Links database. We thank Russ
Wermers for making this database available. For more detailed information, please see Wermers (2000).
14
There are a number of data sources to identify managers: CRSP (e.g., Kacperczyk and Seru (2007)),
Morningstar (e.g., Pool, Stoffman, and Yonker (2012)), and other sources such as Nelson’s Directory of In-
vestment Managers, Zoominfo, and Zabasearch (e.g., Kacperczyk, van Nieuwerburgh, and Veldkamp (2014)).
Recent papers highlight the challenges of identifying the management structure (e.g., team- or anonymously-
managed) using CRSP or Morningstar. According to Massa, Reuter, and Zitzewitz (2010), the main problems
arise from (i) CRSP sometimes not reporting any manager name when a fund has more than three man-
agers, and (ii) Morningstar classifying any fund with more than two managers as “Team Managed” (prior to
1997), without reporting the managers’ names. Another data concern is that some team-managed funds are
misclassified as single-managed funds (Patel and Sarkissian (2014)). As we do not focus on different types
of management structures, these issues are not critical. Nonetheless, we follow Agarwal, Ma, and Mullally
(2015) and exclude cases where a manager runs more than four funds, as these managers are likely to be team
managers. Note that some of the concerns pointed out in the past are not applicable to our data set, since

12
covers the period 1992 to 2012. The fraction of managers that manage more than one fund
in our sample is 27%, and these managers manage 30% of the total assets in domestic equity
actively managed mutual funds. In the data we construct from CRSP, a multi-fund manager
typically manages two open-end mutual funds for four years. While our paper does not study
how mutual fund managers become multi-fund managers or managers’ incentives, Agarwal,
Ma, and Mullally (2015) report that these managers are usually more experienced and have
performed well in the past, after which they either start new funds or take over other funds
within the same fund company. Agarwal, Ma, and Mullally (2015) also show evidence
of performance deterioration in the old funds they have been managing and performance
improvement in the acquired funds, suggesting a potential agency problem. Yadav (2010)
shows that star funds can result in investors’ flows into other funds managed by the same
manager, and managers have an incentive to create more different portfolios to increase the
likelihood of generating a star fund.

Although we do not analyze the emergence of multi-fund managers in the market, we

discuss a few potential explanations. First, companies may use additional funds to retain
good managers; there is already evidence for that in other parts of the fund industry. For
example, star mutual fund managers can manage hedge funds side-by-side (Nohel, Wang,
and Zheng (2010); Deuskar et al. (2011)), and well-performing closed-end fund managers are
sometimes given an additional fund to manage (Wu, Wermers, and Zechner (2015)). Second,
using existing managers can help fund companies overcome labor market frictions in the form
of asymmetric information, as companies are better informed about current managers than
new hires (Berk, van Binsbergen, and Liu (2014)). Third, smaller organizations with fewer
employees work more efficiently if information is “soft” and cannot be credibly transmitted
(Stein (2002); Chen et al. (2004)), so some fund companies simply assign one of the existing
managers to a new fund instead of hiring a new manager.

To test the model in Section I, we randomly pick two funds from each multi-fund manager,
but our results are mostly unchanged if we restrict our analysis to managers who only
have two funds (reported in the Internet Appendix, Table IA.III; note that most multi-fund
managers, about 85% in our data, have two mutual funds only). After a manager starts
managing a fund, we require at least six months of data on past monthly returns during his
tenure to estimate his performance. In the end, we have 19,538 fund-month observations in
we have hand-cleaned the data using public information available outside of CRSP. For example, differences
in reporting the manager’s name are something that we explicitly account for. Finally, we report in the
Internet Appendix (Table IA.V) that our main results of flow-performance and predictability regressions
are similar, even when we only use fund-pairs that have consistent manager information from Morningstar
Direct.

13
our baseline flow-performance regression. Insert
Table I
Table I reports summary statistics of the main attributes of multi-funds in our sample
(Panel A) and of funds that are managed by single-fund managers (Panel B). The single-
fund managers are defined as managers who manage only one fund. We report summary
statistics on fund flow, performance and risk measures, age, TNA, total expense, and total
family TNA. As evident from Table I, funds managed by multi-fund managers do not seem
to be materially different from funds managed by single-fund managers: average flows into
these two types of funds are both 0.5% per month, average alphas are at −2 to −7 bps per
month, and average total expenses are at 1.5% per year; fund age (median ln(Age) is 2.5), size
(median ln(F undSize) (in $ millions) is 5.5 to 5.8), and family size (median ln(F amilySize)
(in $ millions) is 8.9 to 9.4) are all similar. As the number of funds a manager manages is not
exogenous, we do not claim that our sample of multi-fund managers’ funds is the same as the
remaining part of the U.S. equity mutual fund universe. Nevertheless, multi-fund managers
still make up a sizable part of the industry, and we believe that they provide an interesting
setting to study investors’ capital allocation decisions, as discussed in the Introduction. Insert
Table II
Table II compares the two funds of multi-fund managers, Funds 1 and 2, which are as-
signed without specific regard to their age and other characteristics. Average characteristics
such as alphas, standard deviation of return, age, size, total expense, and loadings on the
Carhart (1997) factors, are similar across the two groups.15

III. Results: Cross-Fund Flow-Performance

Relationship

We test the model’s predictions in this section. Section III.A presents the empirical
results of flow-performance regressions. After showing that the response is consistent with
investor sophistication in Section III.B, we conduct some robustness tests in Section III.C.
These tests aim to confirm that our results are not picking up market- or industry-wide
effects that affect mutual fund flows generally, or investor learning from other (different-
manager) funds (as documented by Cohen, Coval, and Pastor (2005); Jones and Shanken
15
This does not mean that the two funds of the same manager are always very similar. If we remove all
common holdings between the two funds (say, both funds hold 3% in IBM), the median “uncommon weight”
is about 60%. Many of the stock picks are specific to each fund, which may not be too surprising because the
funds often have different styles (due to institutional restrictions or client preferences, etc.), and managers
have incentives to create at least one good performing fund (Yadav (2010)), so they do not necessarily pick
the same set of stocks in both funds. Section III.B provides an empirical proxy for the difference in styles
between the two funds.

14
(2005); Brown and Wu (2015)).

A. Flow-Performance Regressions

The dependent variable in our first set of regressions, F lowit , is the proportional growth
in total net assets (T N Ait ) under management for fund i between the beginning and the end
of month t, net of internal growth Rit , assuming reinvestment of dividends and distributions.

T N Ait − T N Ai,t−1 (1 + Rit )

F lowit = .
T N Ai,t−1

We follow standard practice in the literature and winsorize the top and bottom 2.5% tails
of the net flow variable to remove errors associated with mutual fund mergers and splits, as
documented by Elton, Gruber, and Blake (2001).16

We use four-factor alpha (Alphait ) as a measure of fund performance. While there are
obviously other measures of performance, risk- or style-adjusted returns are preferred over
raw returns because the two funds managed by the same manager often have different objec-
tives. Consistent with our model’s predictions being based on excess (benchmark-adjusted)
returns, our empirical analysis focuses on differences in fund performance that are not simply
a result of differences in their styles or objectives. Alphait is the risk-adjusted returns (αi )
in the preceding 12 months estimated using Carhart (1997) four-factor model (we suppress
the subscript t; the regression is run for every 12-month window). A 12-month window is
chosen with the consideration that multi-fund managers typically manage the two funds over
a period of four years.

Alphait is the intercept term in the following regression:

rit − rf t = αi + βi,M KT M KTt + βi,SM B SM Bt + βi,HM L HM Lt + βi,U M D U M Dt + it .

In the first set of tests, we run a flow-performance regression that is motivated by equation
(12) in Section I. The dependent variable in the regression is monthly flows into one of the
funds of a multi-fund manager, F lowt (all the subscripts i are dropped for brevity). Our
main coefficient of interest is the lagged performance in the other fund (Alpha2t−1 ) of the
manager, while we control for the lagged performance in the corresponding fund (Alphat−1 ).17
16
We also use an alternative definition of F lowit , which has an additional term (1+Rit ) in the denominator.
Using this definition, flows will not be lower than −100%. The Internet Appendix (Table IA.I) shows that
our results are robust to the alternative measure.
17
In the Internet Appendix (Table IA.III), we use style-adjusted returns instead of alphas as an alternative
specification. The style-adjusted return is calculated as the monthly return on the fund, in excess of the

15
We include a number of control variables in our analysis. These include a measure of fund
age (ln(Aget−1 )) calculated by the natural logarithm of (1 + fund age), lagged fund size
(ln(F undSizet−1 )) measured by the natural logarithm of fund TNA, lagged total expense
(Expenset−1 ) which is the sum of expense ratio plus one-seventh of the front-end load, a
measure of the total risk of a fund measured by the standard deviation of fund raw returns in
the preceding 12 months (Stdrett−1 ), the contemporaneous total flows into the corresponding
objective of the fund (ObjF lowt ), and year-month fixed effects. We also control for flows
in the preceding five months, since monthly flows are predicted by past fund performance
as well as past monthly flows (e.g., Coval and Stafford (2007)). Our baseline regression
specification is as follows:18

F lowt = α + β1 Alphat−1 + β2 Alpha2t−1

+ β3 ln(Aget−1 ) + β4 ln(F undSizet−1 ) + β5 Expenset−1

t−1
+ β6 Stdrett−1 + β7 ObjF lowt + βs F lows
s=t−5

+ βx YearMonthFixedEffects x + t . (15)
x

We use both funds of a multi-fund manager in the flow-performance regressions. In the

sample there are two funds for a given manager in a given month. These are counted as
two observations. For example, in one observation, we study the flow into one fund (say,
F1) and the performance in the other fund (say, F2) of the manager. Then in another
observation, F2 becomes the fund in question and F1 becomes the “other fund.” We address
concerns regarding correlations between error terms by clustering the standard errors in the
regressions at the manager level.19 Insert
Table
Table III shows the results of our regressions (the subscripts t and t − 1 are dropped
III
for brevity). Column (1) supports Proposition 1: both Alpha and Alpha2 are positive and
significant. The results are consistent with our model, in which investors should learn about
average return on all funds in the same CRSP investment objective code from the prior 12 months. The
regression equation for this alternative specification is the same as equation (15), except that the performance
variables are defined based on style-adjusted returns. Our conclusions remain very similar.
18
Since our sample of multi-fund managers is a subset of all mutual funds, we do not have too many
observations in each month-year and we choose to conduct our main analysis in a panel regression. Nev-
ertheless, after excluding the month-years with fewer than 25 observations, we find that the results using
Fama-Macbeth regressions are similar to those using panel regressions. The Fama-Macbeth regressions are
reported in the Internet Appendix (Table IA.II).
19
Manager or family fixed effects are included in some specifications, because recent studies show that
certain family (e.g., Hortacsu and Syverson (2004)) and managerial characteristics (e.g., Kumar, Niessen-
Ruenzi, and Spalt (2015)) attract more flows.

16
managerial ability from past performance in the fund, as well as in the manager’s other fund.
The magnitude of the coefficient of Alpha2 is about 17% of that of Alpha. Increasing Alpha
by one standard deviation increases flows by 0.38% (of Total Net Assets) per month, while
the same increase in Alpha2 increases flows by 0.06% (of TNA) per month. We noted in
Section I.A that if W12 is lower than a certain threshold, then investors should react more
strongly to the fund itself than to the other fund. The current results may be explained
by this, but may also be explained by investors’ insufficient response to the other fund; the
latter is explored in Section IV.

The next column runs the same regression, adding interactive terms between Alpha and
ln(Age) and between Alpha and Stdret (as in Huang, Wei, and Yan (2007, 2012)). The
results are similar. Note that in Column (2), the coefficients of Alpha and Alpha2 are not
directly comparable in the presence of the interactive terms.

Our theory model predicts a linear relationship between flows and performance. However,
Huang, Wei, and Yan (2007) show that participation costs generate a convex relationship. To
empirically allow for different flow-performance sensitivities at different levels of performance,
we employ the piecewise linear specification from Sirri and Tufano (1998) in Columns (3) and
(4). For each fund i in month t, we assign a fractional performance rank (Rankit ) ranging
from 0 (poorest performance) to 1 (best performance) according to its past 12-month four-
factor alpha, relative to all funds in the same month. Then three variables are defined accord-
ing to Rankit : the lowest performance quintile as Low Alphait = Min(Rankit , 0.2), the three
medium performance quintiles grouped as M id Alphait = Min(0.6, Rankit − Low Alphait ),
and the top performance quintile as High Alphait = Rankit − M id Alphait − Low Alphait .
This regression specification is similar to equation (15), except that the performance mea-
sures are now represented by the quintile variables: Alpha in equation (15) is replaced by
three independent variables, Low Alpha, M id Alpha, and High Alpha, based on lagged
performance in the corresponding fund; Alpha2 is replaced by three independent variables,
Low Alpha2, M id Alpha2, and High Alpha2, based on lagged performance in the man-
ager’s other fund.20 Column (3) suggests that flows into a fund are positively related to
the fund’s own past performance in all quintiles. The strongest effect is observed in the
highest-performing group.
20
The coefficients are interpreted as follows: Suppose the coefficients of Low Alpha, M id Alpha, and
High Alpha are β1 , β2 , and β3 , respectively, and that the regression intercept is α. If all other independent
variables are equal to zero, a fund in the 5th percentile would have flows that equal (α + Low Alpha × β1 =
α+0.05β1 ), while a fund in the 95th percentile would have flows that equal (α+Low Alpha×β1 +M id Alpha×
β2 + High Alpha × β3 = α + 0.2β1 + 0.6β2 + 0.15β3 ). The corresponding variables of the other fund
(Low Alpha2, M id Alpha2, and High Alpha2) are interpreted similarly.

17
 The Alpha2 variables in Column (3) are all weaker than the corresponding Alpha vari-
ables. Only High Alpha2 is statistically significant. Our results are therefore more promi-
nent when the performance in the other fund is in the top quintile, perhaps because mutual
fund managers or companies make high-performing funds more visible to investors and in-
vestors pay more attention to these funds. When we examine the magnitude of the effect,
the coefficient of High Alpha2 is 49% of that of High Alpha (i.e., when the fund in question
is in the top quintile), considerably higher than the ratio in the linear regression in Column
(1). As such, if both funds of the same manager are performing very well, investors’ flows
into a fund are relatively more sensitive to the performance in both funds. Moving Alpha
ten percentiles in the highest performance group, say, from the 85th to the 95th percentile,
corresponds to a greater inflow of 0.39% (of Total Net Assets) per month, while the same
change in Alpha2 is associated with a greater inflow of 0.19% (of TNA) per month. The
last column adds manager fixed effects as extra control variables. The results are similar:
High Alpha2 remains statistically significant, while Low Alpha2 and M id Alpha2 are still
insignificant.

While Columns (1) to (4) already control for the total flows into the corresponding
objective of the fund (ObjF low), we further deal with potential effects of investors’ style
chasing by examining an alternative flow measure. We define objective-adjusted flows as flows
into the fund minus the average flows into the corresponding objective of the fund. Columns
(5) to (8) repeat Columns (1) to (4) using objective-adjusted flows as the dependent variable
(ObjF low is removed from the list of independent variables). Our conclusions remain the
same, so style chasing cannot explain our results.21

B. Cross-Sectional Results

If investors are learning about managers’ ability in a sophisticated manner, flows should
be more responsive to the other fund in situations where the signal provided by the other
fund is more relevant and useful. Four predictions are formalized in Section I.B. We expect
that investors learn more from the other fund and less from the own fund, when (i) excess
returns are more transferable across funds (Proposition 2), (ii) the signal from the own fund
return is noisier (Proposition 3), and (iii) the signal from the other fund return is more
precise (Proposition 3). We also expect flows to be less sensitive to past performance in
21
Instead of using flows into funds in the same objective, a further robustness test is conducted using flows
into funds in the same style, defined based on past Carhart (1997) four-factor loadings. We do this in case
some funds follow investment styles that are different from the objectives stated in their prospectus. The
results, reported in the Internet Appendix (Table IA.IV), are again similar.

18
both funds, when (iv) the manager has been managing the funds for a longer period of time
(Proposition 4).

To measure the transferability of skill across funds (W12 in equation (5)), we calculate
StyleDifference as follows:

β1,M KT β1,SM B β1,HM L β1,U M D

StyleDifference = abs( − 1) + abs( − 1) + abs( − 1) + abs( − 1),
β2,M KT β2,SM B β2,HM L β2,U M D

where β1,X and β2,X are the two funds’ loadings on the Carhart (1997) factors estimated
from the past 12 months. StyleDifference is a measure to capture the difference in factor
loadings.

We believe that W12 depends on this difference. For example, if a manager has a large-
value fund and a small-growth fund, skill shown in one fund is less likely to be carried to the
other fund. For the volatility of the signal from fund returns (V1 and V2 in equation (4)), we
use the standard deviation of fund raw returns in the preceding 12 months (Stdret). Then,
we define a set of dummy variables: StyleRank, which equals 1 when StyleDifference is above
the median based on all historical records up to the current month; V olRank (V ol2Rank),
which equals 1 when Stdret of the fund (of the other fund) is above the sample median
in the corresponding month; T imeM anageRank, which equals 1 for the latter half of the
manager’s tenure in the corresponding fund-pair.22 We interact the dummy variables with
performance measures in the own fund and in the other fund, and run the flow-performance
regression, equation (15). Insert
Table
Column (1) of Table IV shows that the coefficient of Alpha2 is significant at 1% level, but
IV
if StyleDifference is above the historical median (i.e., StyleRank = 1), the effect of Alpha2
becomes significantly weaker and is close to zero, while the effect of Alpha becomes even
stronger. Column (2) attempts to control for both style and volatility. One concern is that
volatile fund returns may give noisy beta estimates, thereby causing a higher StyleDifference
mechanically. We address this concern by introducing another dummy variable that controls
for high volatility in the two funds. In every month, we rank all managers on whether
they have at least one fund more volatile than the sample median (i.e., V olRank = 1 or
V ol2Rank = 1) and note the median multi-fund manager. Then the dummy variable,
OneV olatileF und, equals 1 if the manager ranks above this median manager in the month.
The results of StyleRank interaction variables in Column (2) are similar to those of Column
22
T imeM anageRank is measured within the fund-pair, and is the exact analog of the model parameter
T . Also, as we do not observe the managers’ complete track records, managers’ overall tenure (i.e., how long
they have been managing funds in the mutual fund industry) cannot be measured correctly. In contrast,
T imeM anageRank can be measured in our data.

19
(1), suggesting that style and volatility have different impacts on the coefficients of Alpha
and Alpha2. These results support Proposition 2.

As predicted by Proposition 3, in Column (3), Alpha2 is significantly stronger and Alpha

is significantly weaker if Stdret is above the median, that is, V olRank = 1. In Column
(4), the interaction terms Alpha × V ol2Rank and Alpha2 × V ol2Rank are introduced in
the regression. The interactions involving V olRank (from the own fund) are statistically
significant, but those involving V ol2Rank (from the other fund) are insignificant. Consistent
with the results from Table III (that is, investors use signals from the other fund only when
the performance is high), investors do not seem to always fully use information from the
other fund. Finally, Column (5) supports Proposition 4. Both own-fund and cross-fund
flow-performance relationships are significantly weaker in the second half of the manager’s
tenure in the fund-pair.

Taken together, Tables III and IV suggest that the flow-performance relationship in multi-
funds arises, to a large extent, from investor sophistication: mutual fund investors seem to
draw inferences about a manager’s skill from the other fund’s past performance, particularly
when it provides more information. The findings are unlikely to be explained by a behavioral
bias such as trend-chasing; in such a case, we do not expect that the effects of Alpha and
Alpha2 will vary in a systematic manner as predicted by our model.

C. Robustness: Family Effects and Placebo Tests

The significance of the coefficients of Alpha2 variables may be attributed to family effects,
since the two funds of the multi-fund managers belong to the same fund family. In Table
V, we address this concern by controlling for information from the family. Brown and Wu
(2015) show two opposite impacts of family performance: a positive common skill effect and
a negative correlated noise effect. Their results are similar in spirit to ours: their proxy for
the common skill component is the average management overlap rate between the fund and
other funds in the family. In their sample, Brown and Wu (2015) show that their proxy
for the common skill effect dominates on average. In Column (1), we omit Alpha2 from
the regression but include the family average alpha (F amilyAlpha, excluding the fund in
question but including the manager’s other fund) as an independent variable. The coefficient
of F amilyAlpha is positive and significant, consistent with Brown and Wu (2015). Insert
Table V
In Column (2), we include Alpha2 as an additional independent variable and define
F amilyAlpha as the average family alpha excluding the two funds managed by the manager.

20
Column (3) introduces an extra dummy variable that represents stellar performance (top 5%
based on past alpha) of other funds in its family, following Nanda, Wang, and Zheng (2004).
Nanda, Wang, and Zheng (2004) find that the stellar performance can create a spillover
effect to increase the inflows into other funds in the family. Column (4) further includes
family fixed effects to control for time-invariant unobservable family characteristics. The
results in all three columns are generally unaffected by these additional control variables:
the coefficients of Alpha2 are statistically significant, similar to Table III.

An interesting observation is that F amilyAlpha is negative and significant in Columns

(2) to (4). Using managers who manage two funds, our test allows us to better understand
the different aspects of the common skill effect, namely common management (i.e., manager)
and availability of resources at the family level (e.g., access to common resources such as
research analysts and brokers). We find that the average family alpha (excluding the two
funds managed by the manager) has a negative impact on fund flows. Therefore, our evidence
suggests that, after controlling for the performance in the manager’s other fund, the positive
common skill effect of other funds in the family is dominated by negative effects such as
correlated noise.

We further distinguish between manager and family effects in two “placebo tests,” which
also control for market-wide events or other factors that may impact funds with similar
characteristics. The first placebo test examines the two funds in a period when they are
managed by different managers. Suppose a multi-fund manager manages the two funds
during the time interval [ta , tb ], and the two funds exist and are managed by different people
outside the interval. We examine the periods [ta − 24, ta − 12] and [tb + 12, tb + 24]. We skip
12 months before ta and 12 months after tb with the consideration of our alpha estimation.
If flows chase past performance because of other common factors impacting the two funds,
then we would still see a positive relationship between flows and Alpha2 variables. However,
Table VI Columns (1) and (2) show that this is not the case. In Column (1), the coefficient
of Alpha2 is marginally significant but negative (consistent with the result of F amilyAlpha
in Table V, as these fund pairs are in the same fund family). In Column (2), the coefficients
of the Alpha2 variables, in all performance quintiles, are statistically indistinguishable from
zero. Insert
Table
Second, we make use of control funds, matching on characteristics that matter for flows.
VI
Let F1 be the fund in question and F2 be the other fund. We then find a control fund, M2, to
match F2. Our matching algorithm, much like the commonly-used stock-matching algorithm
employed in Loughran and Ritter (1997), finds the “nearest fund.” The procedure is outlined
in Appendix C. We use the same M2 throughout the manager’s tenure in the two funds. The

21
idea is to choose a fund within the family and/or of similar size, and with the most similar
average characteristics, based on those that are included in the baseline flow-performance
regression (equation (15)). Table VI Columns (3) and (4) repeat Table III Columns (1) and
(3), replacing Alpha2 (i.e., four-factor alpha of F2) variables with variables based on the
four-factor alpha of M2. If our previous results are mostly due to investors’ learning about
the multi-fund manager, flows into F1 would not respond to the past performance of M2.
The results in this placebo test are in line with our expectation. None of the variables,
Alpha2 (in Column (3)), Low Alpha2, M id Alpha2, and High Alpha2 (in Column (4)), is
significant.

Overall, this section shows that mutual fund investors chase performance in the direction
predicted by our model.

IV. Results: Cross-Fund Return Predictability

Our next question is whether there is any cross-fund return predictability: can one fund’s
return predict subsequent performance in the other fund? The sign of such predictability is
evidence that investors systematically move too little (positive predictability) or too much
(negative predictability) capital across funds, relative to our frictionless rational benchmark.
This research question differentiates our paper from other studies on cross-fund learning,
such as Cohen, Coval, and Pastor (2005), Jones and Shanken (2005), and Brown and Wu
(2015). We not only provide evidence that investors learn, but also ask whether they are
responsive enough to signals, as is typically assumed in theoretical models such as Berk and
Green (2004).

Our test is derived from the equilibrium in Section I.A. Equation (6) states that all funds
should earn zero expected excess net returns, from the investor’s perspective. The intuition
behind the mechanism is described as follows. Investors chase performance in the other
fund because they want to allocate more money to skillful managers, and diseconomies of
scale cause inflows to drive down performance. Investors competitively supply funds so that
their expected excess net returns going forward are zero. Therefore, in a frictionless and
rational equilibrium, one would see zero cross-fund return predictability.23 We consider our
23
This test is similar in spirit to Glode et al. (2012), who use Berk and Green’s (2004) model as a
benchmark and study own-fund predictability in up and down markets. It is possible that investors respond
to fund performance with the right level of capital flows in the single fund setting — performance seems
unpredictable in some cases such as directly-sold funds (Del Guercio and Reuter (2014)). However, to the
best of our knowledge, no one has yet looked at predictability with multiple funds. This is surprising, as
we argue later in this section, since the multi-fund setting is particularly suitable for allaying price-pressure

22
test a joint-hypothesis test: the joint null is that inflows (outflows) deteriorate (improve)
performance and that investors allocate their capital in accordance with our frictionless
benchmark. A number of studies indicate diseconomies of scale in mutual funds (e.g., Chen
et al. (2004); Pollet and Wilson (2008); Yan (2008); Golez and Shive (2015)).24

Under the assumption that size erodes performance, if investors move too little capital
out of Fund 1 in response to poor past performance in Fund 2, Fund 1 will then be larger
than what it should be and will perform poorly. That is, poor past performance in Fund 2
would predict subsequent poor performance in Fund 1. The same mechanism also applies to
cases where investors move too little capital into Fund 1 when Fund 2 has performed well
(thus Fund 1 will be smaller than what it should be): good past performance in Fund 2 would
predict future good performance in Fund 1. If, however, investors move too much capital
in response to signals from the other fund, past performance in one fund would negatively
predict future performance in the other fund. If the allocation is “correct,” then we would
not observe any cross-fund predictability in fund performance.

Note that mutual fund returns generally show some persistence when performance is
poor, as documented by Carhart (1997). Lou (2012) finds that this phenomenon is at least
partially driven by the predictable price pressure arising from flows. When facing outflows,
losing funds liquidate their existing holdings, which are concentrated in past losing stocks.
concerns that may obscure the relationship between own-fund predictability and the mechanism in Berk and
Green’s (2004) equilibrium.
24
The joint null exactly mirrors Berk and Green’s (2004) model. A growing literature investigates the
diseconomies of scale in the money management industry. As conjectured by Berk and Green (2004),
managers seem to run out of ideas (e.g., Pollet and Wilson (2008); Cremers and Petajisto (2009)) and
incur greater trading costs (e.g., Edelen, Evans, and Kadlec (2007)) as their asset base grows. Reuter and
Zitzewitz (2015) use an exogenous variation in fund size that is triggered by Morningstar star rankings.
This strategy, however, generates economically modest variation in fund size, and Reuter and Zitzewitz
(2015) do not find evidence for diseconomies of scale. Pastor, Stambaugh, and Taylor (2015) discuss an
omitted variable bias in estimating the relationship between fund returns and size through OLS. The omitted
variables introduce a positive bias in the coefficient estimate, because skill and size are likely to be positively
correlated. Diseconomies of scale (negative coefficient in a regression of fund performance on lagged size)
are therefore more difficult to detect using OLS. Despite this, some previous papers have documented a
negative relationship between fund returns and size. To correct for the bias, Pastor, Stambaugh, and Taylor
(2015) propose a method known as “recursive demeaning,” which requires the availability of a long time
series. A long time series is more readily available at the industry level but not at the fund level. As a
result, recursive demeaning method may lack statistical power for fund-level tests (the recursive demeaning
procedure provides economically larger estimates of diseconomies of scale than OLS, but the estimates are
statistically insignificant). Pastor, Stambaugh, and Taylor (2015) conclude that “Overall, we find mixed
evidence of decreasing returns to scale at the fund level. The estimates are invariably negative, but our tests
do not have enough power to establish statistical significance” (P.25). They show stronger diseconomies of
scale at the industry level.
Finally, there is also some evidence of decreasing returns to scale outside open-end mutual funds. For
example, Fung et al. (2008) and Ramadorai (2013) find such evidence for hedge funds, and Wu, Wermers,
and Zechner (2015) for closed-end funds.

23
The future return of these losing stocks is further driven down by the price pressure, and as a
result, the funds tend to perform poorly in the next period. Therefore, testing predictability
in a single-fund setting may not directly measure investors’ response to managers’ past
performance. In contrast, using two funds from the same manager allows us to directly
control for past return and allay price-pressure concerns in the own fund. We are also able
to measure the degree of holdings overlap between funds. Price pressure should be less of a
problem when the two funds have a lower overlap.

A. Portfolio Sorts

To test our hypothesis, we first use a single sort: we form portfolios using Fund 2 of the
manager.25 We sort all Fund 2s into quintiles, based on the past 12-month alpha of Fund 1 of
the manager. In each quintile, we form portfolios that are rebalanced monthly and held for
different time horizons t: 1 month, 3 months, 6 months, and 12 months. Therefore, in each
month we rebalance 1/t of each portfolio. For every quintile, the portfolio returns are the
cumulative after-fee returns of Fund 2s in the corresponding quintile. The portfolio alphas
are calculated by regressing the portfolio returns on Carhart (1997) four factors using the
whole sample period. The reported t-stats are based on Newey-West standard errors with
three lags. Insert
Table
Table VII shows the portfolio alphas. Panel A sorts Fund 2s on after-fee Alpha of Fund
VII
1, and Panel B sorts on before-fee Alpha of Fund 1. The two panels show similar patterns:
we see increasing portfolio alphas as we move from quintile 1 (lowest Alpha) to 5 (highest),
with quintile 1 showing negative alphas and quintile 5 showing weakly positive alphas. The
results hold for different holding periods. The long-short portfolio (5 minus 1) earns an alpha
of around 18–47 bps per month.26

Although we find that performance in one of the manager’s funds predicts future returns
in the other fund, this could just be a reflection of the previously documented own-fund
persistence (which could be either due to incomplete learning or flow-driven price pressure)
and the contemporaneous correlation between the two funds’ returns. We therefore examine
the other fund’s incremental predictive power through double-sorts. Specifically, we first sort
all Fund 2s into terciles based on the funds’ own past performance. Then within each tercile,
we sort funds into quintiles, this time based on past performance in the manager’s Fund 1.
25
Even though we do not control for other factors in the single sort, price pressure is still less of a concern,
since portfolio overlap between Fund 1 at t and Fund 2 at t + 1 is lower than that between Fund 1 in two
consecutive periods.
26
Notice that this is not a fully implementable trading strategy: a large portion of the profits comes from
the short leg of the portfolios, and mutual funds cannot be short sold.

24
The returns of the five other-fund-performance quintile portfolios are then averaged across
different terciles of own-fund performance. That is, if r(i, j) is the return of the portfolio of
funds in the ith tercile of own-fund performance and j th quintile of performance in the other
fund, we compute, for j = 1, . . . , 5:27

r(1, j) + r(2, j) + r(3, j)

r(j) = .
3

Therefore, the final long-short return we compute is:

[r(1, 5) − r(1, 1)] + [r(2, 5) − r(2, 1)] + [r(3, 5) − r(3, 1)]

r = r(5) − r(1) = .
3

If future returns are entirely predicted by past own-fund performance, then r(i, 5) = r(i, 1)
for all i and r = 0. The magnitude of persistence in cross-fund returns obtained from this
test therefore captures the predictability from past performance in the manager’s other fund,
above and beyond own-fund persistence. Compared to the single-sorts in Table VII, the 5
minus 1 quintile portfolio returns shown in Table VIII Panel A are a bit smaller, but still
statistically significant in most horizons; the returns also come mostly from lower quintiles
(when the other fund has poor performance).28 (Table IA.VII in the Internet Appendix
shows the full double sort results for the 1-month horizon, without averaging across terciles.) Insert
Table
VIII
B. Additional Tests

A few robustness tests are conducted in Tables VIII and IX. First, one may worry about
omitted factors driving the results. If a manager persistently takes on risk not captured by
the Carhart (1997) four-factor model in both of his funds, and if this risk is compensated,
then the manager’s excess returns in both funds will always be positive and correlated, and
the four-factor alphas we report will be positive. Since our results display an asymmetry on
good and poor performance, an omitted risk factor is unlikely to be playing an important role.
Nevertheless, we perform further checks. Table VIII Panels B and C repeat the double-sort
in Panel A, using a five-factor model and a seven-factor model, respectively.29 Panel D uses
27
We use terciles of the first sorting variable, own-fund performance, instead of quintiles, in order to retain
a sufficient number of funds within each group (i, j).
28
Once we control for own-fund past performance, the lowest quintile shows weaker statistical significance,
perhaps because of price pressure affecting the overlapping parts of these funds. The second lowest quintile
is generally the most significant. The t-stats for the third and fourth quintiles also increase but usually not
enough to become significant. Recall that the cross-fund flow-performance relationship comes primarily from
the top quintile, which still has very weak predictability in this table.
29
The five factors are the Carhart (1997) factors plus the Pastor and Stambaugh (2003) liquidity factor.
The seven factors are the five factors plus short-term and long-term reversals that are obtained from Prof.

25
style-adjusted returns in sorting, and the Carhart (1997) four-factor model in calculating
portfolio alphas. Panel E reverses the order: that is, it uses the Carhart (1997) four-factor
alphas in sorting the funds, and reports the future portfolio style-adjusted returns. Style-
adjusted returns are calculated by the fund return minus the average return on all funds
in the same CRSP investment objective code. Thus, we address an important concern that
using the same risk-adjustment procedure for sorting funds and calculating (post-sorting)
portfolio performance makes results sensitive to model mis-specification. Even when we use
different factor models and calculating methods, our results still hold.

Second, as discussed before, own-fund predictability is at least partly due to price pressure
and tends to reverse in the longer term. We extend the holding horizons to up to 24 months,
skipping the most recent 6 months, in Table IX Panel A. The double sort does not show
any reversal, and therefore the predictability established earlier is unlikely a result of price
pressure. Third, we make use of the two placebo samples in Section III.C (the first set uses
the two funds in a period when they are managed by different managers, and the second
set uses a matching fund). The placebo samples in Table IX Panels B and C do not show
a pattern in predictability like that in Table VIII. This further suggests that the cross-fund
predictability result is not coming from fund-specific omitted risk factors or other trends
impacting similar funds. Insert
Table
We also verify the return predictability in a regression framework. We regress the one-
IX
month-ahead style-adjusted return on the rank of past alpha of the other fund, in the presence
of the rank of past alpha of the fund in question as well as other characteristics:30

StyleAdjustedReturnt+1 = α + β1 AlphaRankt + β2 Alpha2Rankt + β3 ln(Aget )

+ β4 ln(F undSizet ) + β5 Expenset + β6 ObjF lowt + t , (16)

where AlphaRank and Alpha2Rank are the fractional performance ranks from 0 (poorest)
to 1 (best) based on past alphas of the fund in question and the other fund, respectively, as
defined in Section III.A. Other variables in equation (16) are the same as those in equation
(15). As in equation (15), in one observation, we study the risk-adjusted return of one
fund (say, F1) and the alpha of the other fund (say, F2) of the manager. Then in another
Kenneth French’s website.
30
We use the ranks of alphas as they are easier to compare with the results in portfolio sorts. This regression
is also similar in spirit to the double sort in Table VIII Panel E (that is, the dependent variable is future
style-adjusted return, while the past return variables on the right hand side use four-factor alphas). In the
Internet Appendix (Table IA.VI), we report a similar regression with one-month-ahead RiskAdjustedReturn
as the dependent variable. This is the future fund return adjusted by the Carhart (1997) four factors. The
regression can be compared with the double sort in Table VIII Panel A.

26
observation, F2 becomes the fund in question and F1 becomes the “other fund.” We use
standard Fama-MacBeth regressions following prevalent practice in cross-sectional return
predictability tests. Newey-West standard errors using 6 lags are reported. Insert
Table X
Column (1) of Table X shows that the ranks of past alphas of both funds can predict
the next-month return. We note that the coefficient of Alpha2Rank is smaller than that
of AlphaRank. Increasing Alpha2 from 10th to 90th percentile corresponds to a change of
24 bps per month in the next-month return. This is similar in magnitude to the double-
sort in Table VIII. Column (2) is motivated by the results in Tables VII and VIII. We
introduce two dummy variables, LowRank and LowRank2 to indicate, respectively, the fund
in question and the manager’s other fund are in the bottom two quintiles of performance.
The coefficient of LowRank2 is negative and significant, while the regression intercept is
statistically insignificant. The results mirror our portfolio sorts: a fund is likely to continue
to perform poorly if the other fund has performed poorly in the past, while the future
performance of the reference group (the higher three quintiles) is close to zero. Column (3)
further examines the price pressure issue. We add another interactive term to indicate cases
where the two funds’ weight on common holdings is lower than the sample median (when
U ncommon = 1); because of the lower portfolio overlap, price pressure from the other fund’s
holdings should be weaker. Column (3) shows that the cross-fund predictability result is not
coming from cases where the funds have more common holdings.

Finally, we reassess the omitted factor explanation. Column (4) presents another ap-
proach to explore such a possibility. A dummy variable, Highcorr, equals 1 if the manager’s
four-factor risk-adjusted past returns in the two funds show a correlation higher than the
sample median. If managers have always been loading on the same omitted factors in both
funds, past fund returns will be highly correlated even after adjusting for Carhart (1997)
factors. However, column (4) finds that the coefficient of Alpha2Rank is not particularly
stronger when Highcorr = 1, again indicating that omitted factors do not seem to be playing
an important role.

Overall, we find that past performance in one fund predicts future performance in the
other fund — particularly when past performance in a given fund is poor. The evidence is
inconsistent with the hypothesis that the response to Alpha2 is sufficient. Our interpretation
is that investors do not withdraw enough capital after poor performance. This finding is
in line with our earlier evidence on the cross-fund performance chasing behavior, that is,
investors are responsive to signals from the other fund when its performance is high.

27
C. Frictions in Cross-Fund Capital Allocation

In Section I.C, we present an extension of the baseline model to a setting with fric-
tions, under which investors put too much weight on prior beliefs, relative to the baseline
frictionless benchmark. The extension allows for three types of frictions: institutional, in-
formational, and behavioral. Loads make it more costly for investors to move capital across
funds; information on fund performance may not be accessible to investors at zero cost;
and investors may suffer from conservatism (Edwards (1968); Barberis, Shleifer, and Vishny
(1998)) and psychologically overweight priors and underweight new information. In this
section, we explore the role of different types of frictions affecting cross-fund learning.

We show in Appendix B that higher frictions correspond to stronger cross-fund pre-

dictability and weaker cross-fund flow-performance relationship. Intuitively, high frictions
drive investor allocations further away from the rational and frictionless equilibrium in Sec-
tion I.A. To examine institutional and informational frictions, we use two proxies based
on fund loads and fund visibility. Loads represent a type of transactions costs charged by
institutions (fund families). A dummy variable, Loads, is set to 1 if the fund in question
charges front-end or back-end loads, and 0 otherwise. It is more expensive for investors to
move capital into and out of load funds, potentially limiting investors’ adjustments. Second,
higher fund visibility reduces investors’ costs of information acquisition. If the other fund’s
performance is made more visible, then investors’ costs of acquiring information on it should
be much lower. Following Sirri and Tufano (1998), Barber, Odean, and Zheng (2005), and
Huang, Wei, and Yan (2007), we use 12b-1 fees as a proxy for the marketing expenses of the
fund. Another dummy variable, High12b1, is set to 1 if the manager’s other fund’s 12b-1 fees
are in the top tercile of the sample. We interact the two dummy variables with Alpha2Rank
and run regression (16) again, to examine the effects of these frictions proxies on cross-fund
predictability. Insert
Table
In Table XI, Column (1) shows that the coefficient of Alpha2Rank ×Loads is positive but
XI
insignificant, while that of Alpha2Rank is positive and significant. While load funds seem
to have stronger cross-fund predictability, it is not significantly different from the no-load
sample. In other words, there is cross-fund predictability in both load and no-load funds,
suggesting that loads are not the only mechanism limiting investors’ response to the other
fund’s signal. In Column (2), we observe that the coefficient of Alpha2Rank × High12b1
is negative and significant, consistent with our prediction that higher fund visibility in the
manager’s other fund reduces information frictions, leading to weaker cross-fund predictabil-
ity.

28
 We also introduce interaction terms involving these dummy variables and Alpha2 in the
flow-performance regressions (equation (15), Table III). The directions should be opposite
to that in Table XI: high frictions (captured by Loads = 1 and High12b1 = 0) should
correspond to weaker cross-fund flow-performance relationship. Our predictions from the
incomplete learning model in Appendix B are supported by the results in Table XII: the
coefficient of Alpha2 × Loads is negative and significant (Column (1)), while the coefficient
of Alpha2 × High12b1 is positive and significant (Column (2)). Insert
Table
To sum up, the results suggest that institutional frictions such as loads, which are per-
XII
haps important, are not the only drivers of cross-fund predictability; on the other hand,
information frictions play a role. We do not rule out behavioral frictions because they may
co-exist with other types of frictions. Our earlier results show evidence that the cross-
fund predictability relationship is stronger when the manager’s other fund performs poorly.
While it is reasonable to think that the equilibrium may take some time to restore, it is
not immediately obvious why diseconomies to scale should necessarily take longer to set-
in following bad performance, as compared to good performance. On the other hand, our
explanations regarding information and behavioral frictions are perhaps more capable of
handling this asymmetry. If funds or families make well-performing funds more visible, then
some investors would not be able to obtain new information on underperforming funds on a
continuous basis, making them rely more on their prior beliefs when the other fund underper-
forms. Behavioral frictions such as conservatism can be asymmetric if investors selectively
react to good signals from the other fund to justify their investment decisions, that is, they
have confirmation bias, a tendency to favor confirming information either through biased
search or biased interpretation (Lord, Ross, and Lepper (1979); Nickerson (1998)).

V. Conclusion

We develop and test a model of capital allocations in funds managed by two-fund man-
agers. Our paper contributes to the debate on whether mutual fund investors are rational.
The findings generally support the notion that investors rationally infer managerial ability
from past returns of both funds. More specifically, flows into a fund are predicted by past
performance in the manager’s other fund. However, capital allocations do not always seem
to be fully consistent with our fully rational and frictionless world. Under the null hypothesis
that size erodes performance, if investors assess the manager’s performance in both funds
correctly, they would allocate exactly the right amount of capital so that all funds earn zero
expected excess return in the future. The result would be no predictability in performance.

29
However, we find evidence of positive cross-fund return predictability. In particular, investors
do not seem to withdraw enough capital in response to poor performance in the manager’s
other fund, and thus incur losses. We conclude that although the response in flows is in
the right direction, it is not always sufficient. This conclusion is different from the prior
literature on investor learning about mutual funds. Our findings have implications for the
question of why some mutual fund investors continue to invest in poorly performing funds
(Gruber (1996); French (2008)). Frictions in learning about managerial skill may be one
mechanism giving rise to this phenomenon.

We offer some ideas for future research. Our results on predictability are consistent with
the cross-fund flow-performance relationship, that is, flows show a stronger response to the
other fund when it performs well. To formalize this idea, we extend the model based on
investors’ overweighting on priors. We discuss two possible channels that may explain our
overall findings: costly information acquisition, which means that information on the other
assets managed by the manager is not continuously accessible to investors at zero cost; and
conservatism (Edwards (1968); Barberis, Shleifer, and Vishny (1998); Choi and Hui (2014)),
which causes investors to place more weight on priors and less on new information. Under the
first channel, the asymmetry in predictability (stronger when performance is poor) would
arise as fund managers or companies are likely to strategically create spillover effects by
making high-performing funds more visible. We show evidence consistent with this. As for
the other channel, it is reasonable that investors exhibit an asymmetry in conservatism due
to confirmation bias: investors might be justifying their investment decisions by selectively
reacting only to good signals from their chosen managers. By studying a setting where
price pressure is not the main driver of predictability, we hope to shed some light and to
provide a framework for exploring some potential explanations. Our extension is one of these
explanations — there are certainly other ways to extend the model, but any coherent theory
of investor learning should explain the asymmetry in both cross-fund flow-performance and
predictability that we document.

30
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35
Table I. Summary Statistics: Multi-Funds vs Single-Funds
This table presents summary statistics of multi-funds (funds that are managed by people who manage more
than one fund) in Panel A, and of single-funds (funds that are managed by people who manage only one
fund) in Panel B. ln (Family Size) is the natural logarithm of the fund family’s total net assets under
management. All other variables are defined in Table XIII.

Panel A: Multi-Fund Managers’ Funds

Mean Median Std P25 P75
Flow 0.0052 -0.0028 0.0434 -0.0146 0.0147
Alpha -0.0007 -0.0008 0.0092 -0.0050 0.0032
Stdret 0.0497 0.0455 0.0252 0.0313 0.0615
ln (Age) (years) 2.4642 2.4849 0.8037 1.9459 2.9444
ln (FundSize) ($millions) 5.8156 5.8058 1.5439 4.6747 6.9126
Expense 0.0150 0.0148 0.0056 0.0103 0.0192
ln (FamilySize) ($millions) 9.0620 8.8840 2.7380 7.4450 10.7110
N = 29,899

Panel B: Single-Fund Managers’ Funds

Mean Median Std P25 P75
Flow 0.0050 -0.0016 0.0409 -0.0129 0.0145
Alpha -0.0002 -0.0005 0.0089 -0.0043 0.0034
Stdret 0.0467 0.0418 0.0247 0.0288 0.0581
ln (Age) (years) 2.4797 2.4849 0.7985 1.9459 2.9957
ln (FundSize) ($millions) 5.6428 5.4765 1.6603 4.4034 6.7005
Expense 0.0150 0.0144 0.0056 0.0103 0.0192
ln (FamilySize) ($millions) 9.2222 9.3562 2.8916 7.3440 11.2887
N = 60,306

1 ln (FamilySize): N = 17,396 in Panel A and N = 28,389 in Panel B due to missing data

36

Table II. Summary Statistics: the Two Funds of Multi-Fund Managers
This table presents summary statistics of the two funds of multi-fund managers. We pick two funds (F1 and
F2) from each manager. Panel A and B provides information on fund characteristics for F1 and F2,
respectively, and Panel C and D presents estimated loadings from Carhart 4-factor model. All variables are
defined in Table XIII.

Panel A: F1 Characteristics
Mean Median Std P25 P75
Alpha -0.0005 -0.0007 0.0089 -0.0047 0.0031
Stdret 0.0506 0.0463 0.0259 0.0318 0.0619
ln (Age) 2.4803 2.4849 0.8146 1.9459 2.9957
ln (FundSize) 5.9919 5.9829 1.4560 4.9228 7.0170
Expense 0.0146 0.0141 0.0053 0.0101 0.0188

Panel B: F2 Characteristics
Mean Median Std P25 P75
Alpha -0.0006 -0.0007 0.0090 -0.0048 0.0033
Stdret 0.0492 0.0453 0.0239 0.0319 0.0609
ln (Age) 2.4696 2.4849 0.7812 1.9459 2.8904
ln (FundSize) 5.9234 5.9132 1.5528 4.8291 6.9870
Expense 0.0146 0.0145 0.0056 0.0099 0.0193

Panel C: F1 Loadings
Mean Median Std P25 P75
MKT 0.993 0.983 0.322 0.834 1.133
SMB 0.173 0.081 0.460 -0.122 0.414
HML 0.020 0.029 0.556 -0.266 0.307
UMD 0.028 0.010 0.370 -0.138 0.173

Panel D: F2 Loadings
Mean Median Std P25 P75
MKT 0.982 0.974 0.320 0.815 1.132
SMB 0.190 0.105 0.456 -0.105 0.454
HML 0.013 0.020 0.545 -0.271 0.323
UMD 0.039 0.017 0.339 -0.128 0.187

37

Table III. Flow-Performance Regression in Multi-Funds
This table presents the results from flow-performance regressions using ordinary least squares. In columns
(1)-(4), the dependent variable is Flow, which is the proportional monthly growth in total assets under
management; the dependent variable in columns (5)-(8) is Adjusted Flow, which is the Flow minus Obj Flow.
Alpha and Alpha2 are the risk-adjusted returns of the fund and of the other fund. In columns (3)-(4) and (7)-
(8), we use a piecewise linear specification. For each month, we assign a fractional rank from 0 (worst) to 1
(best) to each fund, and define: Low Alpha = Min(Rank, 0.2), Mid Alpha = Min(0.6, Rank – Low Alpha), and
High Alpha = Rank – Mid Alpha – Low Alpha. Standard errors are clustered at the manager level. All other
variables are defined in Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

38

 Flow Adjusted Flow
VARIABLES (1) (2) (3) (4) (5) (6) (7) (8)

Alpha 0.4100*** 0.7489*** 0.4069*** 0.7383***

(0.0500) (0.1589) (0.0497) (0.1581)
Alpha2 0.0697* 0.0787** 0.0654* 0.0742**
(0.0365) (0.0362) (0.0366) (0.0363)
Low Alpha 0.0156*** 0.0149** 0.0163*** 0.0154**
(0.0058) (0.0066) (0.0058) (0.0066)
Mid Alpha 0.0083*** 0.0092*** 0.0082*** 0.0091***
(0.0015) (0.0016) (0.0015) (0.0016)
High Alpha 0.0391*** 0.0485*** 0.0386*** 0.0481***
(0.0096) (0.0115) (0.0096) (0.0115)
Low Alpha2 0.0103 0.0069 0.0102 0.0067
(0.0066) (0.0073) (0.0066) (0.0074)
Mid Alpha2 -0.0025 -0.0029 -0.0024 -0.0028
(0.0017) (0.0018) (0.0017) (0.0019)
High Alpha2 0.0190** 0.0220** 0.0179** 0.0211**
(0.0079) (0.0086) (0.0079) (0.0086)
Alpha x Stdret -2.0138** -1.9474**
(0.9422) (0.9432)
Alpha x ln (Age) -0.0897** -0.0884**
(0.0453) (0.0450)
ln (Age) -0.0008** -0.0009** -0.0008** 0.0000 -0.0008** -0.0009** -0.0008** 0.0000
(0.0004) (0.0004) (0.0004) (0.0006) (0.0004) (0.0004) (0.0004) (0.0006)
ln (FundSize) -0.0003* -0.0003* -0.0003* -0.0021*** -0.0003* -0.0003* -0.0003* -0.0021***
(0.0002) (0.0002) (0.0002) (0.0004) (0.0002) (0.0002) (0.0002) (0.0004)
Expense 0.0535 0.0552 0.0514 -0.0399 0.0508 0.0524 0.0492 -0.0421
(0.0560) (0.0558) (0.0566) (0.0981) (0.0555) (0.0553) (0.0561) (0.0981)
Stdret -0.0348** -0.0332** -0.0430*** -0.0152 -0.0336** -0.0321** -0.0411** -0.0123
(0.0165) (0.0161) (0.0164) (0.0424) (0.0163) (0.0159) (0.0162) (0.0420)
Obj Flow 0.2937*** 0.2958*** 0.2918*** 0.4180***
(0.0547) (0.0551) (0.0553) (0.0672)
Constant 0.0076 0.0081 -0.0008 0.0133* 0.0105** 0.0109** 0.0019 0.0163**
(0.0051) (0.0051) (0.0052) (0.0070) (0.0050) (0.0050) (0.0052) (0.0068)

Observations 19,538 19,538 19,538 19,538 19,538 19,538 19,538 19,538

R-squared 0.365 0.365 0.365 0.275 0.346 0.346 0.346 0.245
Past Flows Yes Yes Yes Yes Yes Yes Yes Yes
Manager FE No No No Yes No No No Yes
Year-Month FE Yes Yes Yes Yes Yes Yes Yes Yes

39

Table IV. Flow-Performance Regression in Multi-Funds: Cross-Sectional Tests
This table presents the results from flow-performance regressions, interacting alphas with style difference,
return volatility and the number of periods that the manager has been managing the two funds. StyleRank and
VolRank (Vol2Rank) are dummy variables that are equal to 1 when the observation is above the sample
median. TimeManageRank equals 1 for the latter half of the manager’s tenure in this fund-pair, and 0
otherwise. The dependent variable is Flow, and Alpha and Alpha2 are the risk-adjusted returns of the fund
and of the other fund. We present results using ordinary least squares with errors clustered at the manager
level. Variable definitions are in Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

40

 VARIABLES (1) (2) (3) (4) (5)

Alpha 0.2944*** 0.4580*** 0.5989*** 0.5725*** 0.5236***

(0.0615) (0.1216) (0.0654) (0.0715) (0.0691)
Alpha2 0.1947*** 0.1624 -0.0622 -0.0788 0.0967*
(0.0608) (0.1145) (0.0637) (0.0776) (0.0586)
Alpha x StyleRank 0.1640** 0.1553*
(0.0809) (0.0806)
Alpha2 x StyleRank -0.1864*** -0.1833***
(0.0700) (0.0686)
Alpha x VolRank -0.2642*** -0.2573***
(0.0877) (0.0896)
Alpha2 x VolRank 0.2034** 0.1927**
(0.0798) (0.0908)
Alpha x TimeManageRank -0.1815**
(0.0779)
Alpha2 x TimeManageRank -0.0370*
(0.0204)
StyleRank -0.0001 -0.0001
(0.0005) (0.0005)
VolRank 0.0003 -0.0001
(0.0008) (0.0008)
TimeManageRank -0.0011*
(0.0006)
Alpha x Vol2Rank 0.0226
(0.0835)
Alpha2 x Vol2Rank 0.0240
(0.0946)
Vol2Rank 0.0007
(0.0006)
Alpha x OneVolatileFund -0.1974*
(0.1177)
Alpha2 x OneVolatileFund 0.0334
(0.1118)
OneVolatileFund -0.0002
(0.0007)
ln (Age) -0.0008** -0.0009** -0.0009** -0.0008** -0.0009**
(0.0004) (0.0004) (0.0004) (0.0004) (0.0004)
ln (FundSize) -0.0003* -0.0003 -0.0003* -0.0003* -0.0003
(0.0002) (0.0002) (0.0002) (0.0002) (0.0002)
Expense 0.0528 0.0560 0.0532 0.0438 0.0622
(0.0559) (0.0559) (0.0560) (0.0584) (0.0567)
Stdret -0.0358** -0.0322 -0.0392* -0.0381 -0.0343**
(0.0165) (0.0202) (0.0233) (0.0246) (0.0169)
Obj Flow 0.2948*** 0.3004*** 0.2977*** 0.2815*** 0.2929***
(0.0546) (0.0551) (0.0543) (0.0556) (0.0550)
Constant 0.0077 0.0075 0.0071 0.0095* 0.0077
(0.0051) (0.0051) (0.0051) (0.0054) (0.0061)

Observations 19,530 19,530 19,538 18,371 19,538

R-squared 0.365 0.365 0.365 0.365 0.372
Past Flows Yes Yes Yes Yes Yes
Year-Month FE Yes Yes Yes Yes Yes

41

Table V. Flow-Performance Regression in Multi-Funds: Controlling for Family Effects
This table presents the results of the flow-performance regressions, controlling for family effects. Column (1)
and (2) control for Family Alpha. In column (1), Family Alpha is the average alpha of the family excluding the
fund; in column (2) the average excludes the two funds from the manager. Column (3) adds Star Manager,
and Column (4) completes the analysis by including Family Fixed Effects. The dependent variable is Flow,
and Alpha and Alpha2 are the risk-adjusted returns of the fund and of the other fund. We present results
using ordinary least squares with errors clustered at the manager level. All other variables are defined in Table
XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2) (3) (4)

Alpha 0.4368*** 0.3863*** 0.3796*** 0.3786***

(0.0374) (0.0461) (0.0462) (0.0479)
Alpha2 0.0878** 0.0828* 0.0791*
(0.0445) (0.0445) (0.0472)
ln (Age) -0.0008 -0.0008 -0.0007 -0.0003
(0.0005) (0.0005) (0.0005) (0.0007)
ln (FundSize) -0.0002 -0.0001 -0.0002 -0.0012***
(0.0002) (0.0002) (0.0002) (0.0003)
Expense 0.1307** 0.1127* 0.1142* -0.1089
(0.0582) (0.0589) (0.0589) (0.1003)
Stdret -0.0227 -0.0198 -0.0198 -0.0099
(0.0151) (0.0153) (0.0153) (0.0199)
Family Alpha 0.0498* -0.1076* -0.1235** -0.1528**
(0.0292) (0.0613) (0.0620) (0.0729)
Star Manager 0.0012* 0.0000
(0.0007) (0.0010)
Obj Flow 0.3922*** 0.4636*** 0.4639*** 0.5230***
(0.0792) (0.0830) (0.0830) (0.0904)
Constant 0.0035 0.0072 0.0065 0.0168
(0.0078) (0.0081) (0.0081) (0.0104)

Observations 12,573 10,943 10,943 10,943

R-squared 0.325 0.328 0.329 0.346
Family FE No No No Yes
Past Flows Yes Yes Yes Yes
Year-Month FE Yes Yes Yes Yes

42

Table VI. Placebo Tests: Flow-Performance Regression in Funds Managed by Different Managers
This table presents the results from the flow-performance regressions, where we use funds that are managed
by different managers. Column (1) and (2) uses the two funds (F1 and F2) in a period when they are managed
by different managers; Column (3) and (4) replaces one of the manager’s funds (F2) with another fund that is
in the same fund family or has similar characteristics, but not managed by the same manager. The dependent
variable is Flow. In columns (2) and (4), we use a piecewise linear specification. For each month, we rank
each fund based on their alphas and assign a fractional rank from 0 (worst) to 1 (best). Then, we define: Low
Alpha = Min(Rank, 0.2), Mid Alpha = Min(0.6, Rank – Low Alpha), and High Alpha = Rank – Mid Alpha –
Low Alpha . We present results using ordinary least squares with errors clustered at the manager level. All
other variables are defined in Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2) (3) (4)

Alpha 0.4684*** 0.4997***

(0.0492) (0.0482)
Alpha2 -0.0909* -0.0538
(0.0470) (0.0376)
Low Alpha 0.0213*** 0.0220***
(0.0072) (0.0059)
Mid Alpha 0.0097*** 0.0084***
(0.0016) (0.0015)
High Alpha 0.0296*** 0.0423***
(0.0088) (0.0089)
Low Alpha2 -0.0022 0.0024
(0.0071) (0.0078)
Mid Alpha2 -0.0004 -0.0018
(0.0019) (0.0014)
High Alpha2 -0.0112 -0.0048
(0.0075) (0.0055)
ln (Age) -0.0009* -0.0009* -0.0009** -0.0009**
(0.0005) (0.0005) (0.0004) (0.0004)
ln (FundSize) -0.0010*** -0.0010*** -0.0002 -0.0001
(0.0002) (0.0002) (0.0002) (0.0002)
Expense -0.0025 0.0110 0.0126 0.0185
(0.0589) (0.0582) (0.0579) (0.0592)
Stdret -0.0502*** -0.0432** -0.0564*** -0.0559***
(0.0166) (0.0172) (0.0179) (0.0169)
Obj Flow 0.5293*** 0.5288*** 0.3542*** 0.3479***
(0.0795) (0.0787) (0.0615) (0.0616)
Constant 0.0115 0.0050 0.0152* 0.0071
(0.0184) (0.0185) (0.0081) (0.0081)

Observations 17,582 17,582 18,876 18,876

R-squared 0.346 0.346 0.359 0.359
Past Flows Yes Yes Yes Yes
Manager FE No No No No
Year-Month FE Yes Yes Yes Yes

43

Table VII. Portfolios Formed Based on Past Performance in the Other Fund
Portfolios are formed using fund 2 of the manager. We sort all fund 2s into quintiles, based on the past 12-
month Carhart (1997) alpha of the manager’s fund 1. Panel A sorts fund 2s on after-fee alpha of fund 1, and
Panel B sorts on before-fee alpha of the fund 1. In each quintile, portfolios are rebalanced monthly and held
for different time horizons t: 1 month, 3 months, 6 months, and 12 months. The portfolio returns are the
cumulative after-fee returns of fund 2s in the corresponding quintile. The portfolio alphas, reported in the
table, are calculated by regressing the portfolio returns on Carhart (1997) four factors using the whole sample
period. We use Newey-West standard errors with 3 lags; t-statistics are presented in parenthesis. *, **, and ***
denote 10%, 5%, and 1% significance, respectively.

Panel A: Sorted on Past Alpha of the Fund 1 (After Fees)

Holding
Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0028** (-2.18) -0.0023* (-1.90) -0.0022* (-1.77) -0.0013 (-1.16)
2 -0.0012 (-1.53) -0.0012 (-1.56) -0.0011 (-1.60) -0.0011 (-1.62)
3 -0.0003 (-0.31) -0.0005 (-0.68) -0.0007 (-1.13) -0.0008 (-1.35)
4 -0.0004 (-0.48) -0.0004 (-0.57) -0.0004 (-0.49) -0.0004 (-0.51)
5 (Highest) 0.0019* (1.82) 0.0018* (1.68) 0.0014 (1.31) 0.0005 (0.51)
5-1 0.0047*** (3.95) 0.0042*** (3.60) 0.0035*** (3.38) 0.0019* (1.89)

Panel B: Sorted on Past Alpha of the Fund 1 (Before Fees)

Holding
Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0025** (-2.02) -0.0022* (-1.77) -0.0021* (-1.75) -0.0013 (-1.15)
2 -0.0014* (-1.69) -0.0012 (-1.48) -0.0010 (-1.40) -0.0010 (-1.50)
3 -0.0005 (-0.52) -0.0007 (-1.05) -0.0009 (-1.44) -0.0009 (-1.40)
4 -0.0002 (-0.30) -0.0004 (-0.54) -0.0003 (-0.40) -0.0004 (-0.54)
5 (Highest) 0.0018* (1.64) 0.0017 (1.59) 0.0013 (1.19) 0.0005 (0.49)
5-1 0.0043*** (3.75) 0.0039*** (3.46) 0.0034*** (3.29) 0.0018* (1.88)

44

Table VIII. Portfolios Formed Based on Past Performance in Both Funds and Basic Checks
Portfolios are formed using fund 2 of the manager. First, we sort all fund 2s into terciles based on their past
12-month performance (perf2). Within each tercile of perf2, we sort all funds into quintiles, based on the past
12-month performance of the manager’s fund 1 (perf1). All sorting is performed using returns after fees.
Finally, we take the equally-weighted average return of fund 2s, across the alpha2 terciles. Since we use
conditional double-sorts, the equal weighted returns to each quintile of past perf1 now controls for own-fund
return predictability.

In each quintile, portfolios are rebalanced monthly and held for different time horizons t: 1 month, 3 months,
6 months, and 12 months. The portfolio returns are the cumulative after-fee returns of fund 2s in the
corresponding quintile. Panel A presents alphas estimated with Carhart (1997) 4-factor model (both portfolio
returns and past performance measures are 4-factor alphas). We then present alphas from alternative models
where we include the Pastor and Stambaugh (2003) liquidity factor (Panel B) as well as short-term and long-
term reversal factors obtained from Prof. Kenneth French’s website (Panel C). Panel D reports results with 4-
factor alphas where portfolios are formed by sorting on style-adjusted returns. Panel E reports results with
style-adjusted returns where portfolios are formed by sorting on 4-factor alphas. We use Newey-West
standard errors with 3 lags; t-statistics are presented in parenthesis. *, **, and *** denote 10%, 5%, and 1%
significance, respectively.

Panel A. Conditional Double Sorts: Using Alphas (after fees) adjusted for 4-factor model
Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0011 (-0.88) -0.0010 (-0.81) -0.0009 (-0.75) -0.0005 (-0.46)
2 -0.0014** (-2.08) -0.0012* (-1.80) -0.0011* (-1.66) -0.0009 (-1.28)
3 -0.0004 (-0.47) -0.0008 (-1.15) -0.0009 (-1.36) -0.0008 (-1.27)
4 -0.0013* (-1.70) -0.0008 (-0.95) -0.0009 (-1.22) -0.0009 (-1.25)
5 (Highest) 0.0017* (1.73) 0.0013 (1.51) 0.0008 (1.03) 0.0001 (0.04)
5-1 0.0028** (2.37) 0.0023** (2.02) 0.0017* (1.74) 0.0005 (0.56)

Panel B. Conditional Double Sorts: Using Alphas (after fees) adjusted for 5-factor model
Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0012 (-0.98) -0.0012 (-1.00) -0.0011 (-0.97) -0.0007 (-0.75)
2 -0.0016** (-2.24) -0.0013** (-1.98) -0.0012* (-1.87) -0.0010 (-1.42)
3 -0.0006 (-0.68) -0.0009 (-1.28) -0.0009 (-1.51) -0.0009 (-1.56)
4 -0.0015* (-1.85) -0.0010 (-1.18) -0.0011 (-1.52) -0.0012 (-1.59)
5 (Highest) 0.0017* (1.68) 0.0012 (1.41) 0.0007 (0.86) -0.0001 (-0.17)
5-1 0.0029** (2.24) 0.0024** (2.01) 0.0018* (1.79) 0.0006 (0.68)

45



Panel C. Conditional Double Sorts: Using Alphas (after fees) adjusted for 7-factor model
Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0009 (-0.83) -0.0009 (-0.86) -0.0009 (-0.85) -0.0006 (-0.61)
2 -0.0015** (-2.10) -0.0013* (-1.85) -0.0012* (-1.73) -0.0009 (-1.31)
3 -0.0006 (-0.64) -0.0008 (-1.20) -0.0009 (-1.38) -0.0008 (-1.42)
4 -0.0013* (-1.64) -0.0008 (-0.99) -0.0010 (-1.35) -0.0011 (-1.45)
5 (Highest) 0.0018* (1.90) 0.0013 (1.60) 0.0009 (1.08) 0.0001 (0.02)
5-1 0.0027** (2.35) 0.0023** (2.07) 0.0018* (1.83) 0.0006 (0.66)


Panel D. Conditional Double Sorts: Sorting on Style-Adjusted Returns

Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0021* (-1.94) -0.0024** (-2.08) -0.0027* (-2.33) -0.0027** (-2.33)
2 -0.0023** (-2.36) -0.0018* (-1.73) -0.0013 (-1.23) -0.0013 (-1.23)
3 -0.0012 (-1.27) -0.0008 (-0.99) -0.0006 (-0.85) -0.0006 (-0.85)
4 0.0003 (0.42) -0.0002 (-0.23) -0.0004 (-0.49) -0.0004 (-0.49)
5 (Highest) -0.0001 (-0.09) -0.0004 (-0.43) -0.0006 (-0.76) -0.0006 (-0.76)
5-1 0.0020* (1.65) 0.0020* (1.83) 0.0021* (1.94) 0.0021* (1.94)

Panel E. Conditional Double Sorts using Style-Adjusted Returns: Sorting on 4-factor Alphas
Holding Period 1-month 3-month 6-month 12-month
Quintiles Style-Adj t-stat Style-Adj t-stat Style-Adj t-stat Style-Adj t-stat
1 (Lowest) -0.0014* (-1.87) -0.0009 (-1.25) -0.0007* (-1.97) -0.0005 (-1.23)
2 -0.0016*** (-3.47) -0.0012*** (-2.83) -0.0013*** (-3.67) -0.0011*** (-2.59)
3 -0.0007 (-1.27) -0.0007* (-1.65) -0.0011* (-1.82) -0.0008 (-1.41)
4 -0.0012** (-2.13) -0.0007 (-1.41) -0.0005 (-1.15) -0.0005 (-1.27)
5 (Highest) 0.0004 (0.65) 0.0006 (1.58) 0.0001 (0.19) -0.0003 (-0.53)
5-1 0.0018* (1.81) 0.0014* (1.65) 0.0009 (1.62) 0.0002 (0.53)

46

Table IX. Portfolios Formed Based on Past Performance in Both Funds: Further Checks
We present further checks for the conditional double sort results presented in Table VIII. Panel A shows the
results at longer horizons: 15-month, 18-month, 21-month and 24-month (all skipping the most recent 6
months). In Panel B and C, we report double sort results using our placebo samples, that is, samples of funds
that are managed by different managers. Panel B uses the two funds (F1 and F2) in a period when they are
managed by different managers; Panel C replaces one of the manager’s funds (F2) with another fund that is in
the same fund family or has similar characteristics, but not managed by the same manager. We use Newey-
West standard errors with 3 lags; t-statistics are presented in parenthesis. *, **, and *** denote 10%, 5%, and
1% significance, respectively.

Panel A. Conditional Double Sorts: In Subsequent Horizons (skipping the most recent 6 months)
Holding
Period 15-month 18-month 21-month 24-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) 0.0001 (0.14) 0.0002 (0.16) 0.0002 (0.16) 0.0000 (0.02)
2 -0.0007 (-0.86) -0.0005 (-0.61) -0.0005 (-0.65) -0.0006 (-0.80)
3 -0.0009 (-1.29) -0.0009 (-1.34) -0.0009 (-1.42) -0.0009 (-1.42)
4 -0.0007 (-0.82) -0.0008 (-1.01) -0.0008 (-1.16) -0.0007 (-1.04)
5 (Highest) 0.0001 (0.14) 0.0001 (0.14) 0.0002 (0.19) 0.0003 (0.31)
5-1 -0.0000 (-0.02) -0.0001 (-0.05) -0.0000 (-0.01) 0.0002 (0.24)

Panel B. Conditional Double Sorts: Using Placebo Sample 1

Holding
Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0009 (-0.65) -0.0009 (-0.73) -0.0010 (-0.84) -0.0005 (-0.48)
2 -0.0006 (-0.56) -0.0009 (-0.89) -0.0015 (-1.59) -0.0012 (-1.31)
3 -0.0009 (-1.05) -0.0004 (-0.46) -0.0006 (-0.78) -0.0005 (-0.55)
4 -0.0005 (-0.54) -0.0008 (-0.87) -0.0005 (-0.51) -0.0002 (-0.23)
5 (Highest) 0.0005 (0.37) -0.0006 (-0.46) -0.0004 (-0.31) -0.0008 (-0.67)
5-1 0.0014 (0.76) 0.0003 (0.20) 0.0006 (0.60) -0.0002 (-0.23)

Panel C. Conditional Double Sorts: Using Placebo Sample 2

Holding
Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) 0.0001 (0.00) -0.0001 (-0.08) -0.0006 (-0.58) -0.0006 (-0.58)
2 -0.0012 (-1.19) -0.0008 (-0.93) -0.0009 (-1.14) -0.0009 (-1.14)
3 -0.0014 (-1.44) -0.0011 (-1.36) -0.0009 (-1.28) -0.0009 (-1.28)
4 -0.0013 (-1.46) -0.0012* (-1.66) -0.0006 (-0.77) -0.0006 (-0.77)
5 (Highest) 0.0018 (1.56) 0.0008 (0.82) 0.0006 (0.81) 0.0006 (0.81)
5-1 0.0018 (1.37) 0.0009 (0.96) 0.0012 (1.55) 0.0012 (1.55)

47

Table X. Regression of Future Performance on Past Performance
This table presents the results of the predictive regressions of future performance on past performance. The
dependent variable is Style-Adjusted Return. Alpha and Alpha2 are the risk-adjusted returns estimated using
Carhart (1997) four factor model and AlphaRank and Alpha2Rank are fractional performance ranks, ranging
from 0 (worst) to 1 (best). Low Rank and Low Rank2 indicate, respectively, that the own fund and the other
fund are in the lowest two performance quintiles. Alpha rank variables are interacted with dummy variables:
Uncommon, indicating that the two funds’ portfolio overlap is below the sample median; Highcorr, indicating
that the correlation of the two funds’ past 4-factor risk-adjusted return is above the sample median. We
present Fama-Macbeth estimates with Newey-West standard errors. All other variables are defined in Table
XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2) (3) (4)

AlphaRank 0.0037** 0.0035*** 0.0039***
(0.0015) (0.0013) (0.0012)
Alpha2Rank 0.0030*** 0.0012 0.0047**
(0.0011) (0.0016) (0.0024)
Low Rank -0.0010
(0.0007)
Low Rank2 -0.0016***
(0.0006)
Alpha2Rank x Uncommon 0.0032*
(0.0017)
Alpha2Rank x Highcorr -0.0022
(0.0025)
Uncommon -0.0001
(0.0012)
Highcorr 0.0002
(0.0016)
ln (Age) 0.0001 0.0001 -0.0001 0.0002
(0.0005) (0.0005) (0.0005) (0.0005)
ln (FundSize) -0.0004** -0.0004** -0.0003 -0.0004**
(0.0002) (0.0002) (0.0002) (0.0002)
Expense -0.0613 -0.0789** -0.0739* -0.0488
(0.0381) (0.0381) (0.0394) (0.0354)
Stdret 0.0806 0.0901 0.0779 0.0820
(0.0632) (0.0653) (0.0732) (0.0644)
Obj flow -0.0114 0.0371 -0.1555 -0.0175
(0.1745) (0.1819) (0.1822) (0.1715)
Constant -0.0030 0.0018 -0.0024 -0.0037
(0.0037) (0.0038) (0.0039) (0.0041)
Observations 19,318 19,318 17,706 19,318
R-squared 0.379 0.367 0.436 0.414
Past Flows Yes Yes Yes Yes

48

Table XI. Regression of Future Performance on Past Performance: Role of Frictions
This table presents the results of the predictive regressions of future performance on past performance. The
dependent variable is style-adjusted returns. Alpha and Alpha2 are the risk-adjusted returns estimated using
Carhart (1997) four factor model and AlphaRank and Alpha2Rank are fractional performance ranks, ranging
from 0 (worst) to 1 (best). Loads is a dummy variable that indicates whether the fund has any front-end or
back-end loads. The dummy variable, High12b1, indicates high 12b-1 fees charged by the other fund (in the
top tercile of the sample). We present Fama-Macbeth (1973) estimates with Newey-West standard errors. All
other variables are defined in Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2)

AlphaRank 0.0038** 0.0031*
(0.0015) (0.0018)
Alpha2Rank 0.0027** 0.0038**
(0.0013) (0.0017)
Alpha2Rank x Loads 0.0016
(0.0016)
Alpha2Rank x High12b1 -0.0039*
(0.0023)
Loads -0.0007
(0.0009)
High12b1 0.0021
(0.0015)
ln (Age) -0.0001 -0.0004
(0.0005) (0.0005)
ln (FundSize) -0.0004* -0.0001
(0.0002) (0.0002)
Expense -0.0640 -0.0668*
(0.0422) (0.0373)
Stdret 0.0740 0.0792
(0.0645) (0.0703)
Obj flow -0.0931 -0.1984
(0.1605) (0.1713)
Constant -0.0019 -0.0030
(0.0034) (0.0044)
Observations 19,318 14,104
R-squared 0.402 0.506
Past Flows Yes Yes

49

Table XII. Flow-Performance Regression in Multi-Funds: Role of Frictions
This table presents the results from flow-performance regressions, interacting alphas with Loads and
High12b1. Loads is a dummy variable that indicates whether the fund has any front-end or back-end loads.
The dummy variable, High12b1, indicates high 12b-1 fees charged by the other fund (in the top tercile of the
sample). The dependent variable is Flow, and Alpha and Alpha2 are the risk-adjusted returns of the fund and
of the other fund. We present results using ordinary least squares with errors clustered at the manager level.
Variable definitions are in Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2)

Alpha 0.4122*** 0.5754***

(0.0496) (0.0622)
Alpha2 0.0787* 0.0163
(0.0425) (0.0606)
Alpha2 x Loads -0.0342**
(0.0171)
Alpha2 x High12b1 0.1749*
(0.0996)
Loads -0.0008
(0.0007)
High12b1 0.0015*
(0.0008)
ln (Age) -0.0008** -0.0010**
(0.0004) (0.0004)
ln (FundSize) -0.0003* -0.0006**
(0.0002) (0.0002)
Expense 0.1199* 0.0500
(0.0687) (0.0707)
Stdret -0.0328* -0.0568***
(0.0176) (0.0188)
Obj Flow 0.2761*** 0.3184***
(0.0536) (0.0612)
Constant 0.0064 0.0127**
(0.0046) (0.0057)

Observations 19,538 14,265

R-squared 0.365 0.377
Past Flows Yes Yes
Year-Month FE Yes Yes

50

Table XIII. Variable Definitions
Flow Proportional monthly growth in total assets under management.
Alpha, Alpha2 Risk-adjusted return in the past 12 months, estimated using Carhart (1997) four factor
model. 2 denotes the other fund.
Low Alpha, For each month, a fractional rank (Rank) from 0 (worst) to 1 (best) is assigned to each
Low Alpha2 fund based on Alpha. Low Alpha = Min(Rank , 0.2). 2 denotes the other fund.
Mid Alpha, Mid Alpha = Min(0.6, Rank – Low Alpha). 2 denotes the other fund.
Mid Alpha2
High Alpha, High Alpha = Rank – Mid Alpha – Low Alpha. 2 denotes the other fund.
High Alpha2
Stdret Standard deviation of fund raw returns in the past 12 months.
ln (Age) Natural logarithm of (1+ fund age).
ln (FundSize) Natural logarithm of fund’s total net assets under management.
Expense Expense ratio plus one-seventh of the front-end load.
Obj Flow Total monthly flows into the corresponding objective of the fund.
StyleRank A dummy variable that indicates Style Difference is above the historical median. Style
Difference is the sum of the absolute percentage differences of Carhart (1997) four
factor loadings between the two funds.
VolRank, A dummy variable that indicates Stdret is above the sample median. 2 denotes the
Vol2Rank other fund.
OneVolatileFund In every month, all managers are ranked based on whether they have at least one fund
with VolRank = 1. OneVolatileFund is a dummy variable that indicates the manager
ranks above the median manager.
TimeManageRank A dummy variable that indicates the latter half of the manager’s tenure in the fund-
pair.
Family Alpha Average Alpha of all funds in the family, excluding Fund 1 (or excluding Fund 1 and
Fund 2).
Star Manager A dummy variable that represents stellar performance (top 5% based on past alpha) of
other funds in the family, following Nanda, Wang, and Zheng (2004).
Style Adjusted The raw return minus the average return on all funds in the corresponding objective.
Return
AlphaRank, For each month, a fractional rank (Rank) from 0 (worst) to 1 (best) is assigned to each
Alpha2Rank fund based on Alpha. 2 denotes the other fund.
LowRank, A dummy variable that indicates Rank is in the lowest two quintiles. 2 denotes the
LowRank2 other fund.
Uncommon A dummy variable that indicates the two funds’ portfolio overlap is below the sample
median.
Highcorr A dummy variable that indicates the correlation of the two funds’ past 4-factor risk-
adjusted return is above the sample median.
Loads A dummy variable that indicates the fund has any front-end or back-end loads.
High12b1 A dummy variable that indicates high 12b-1 fees charged by the other fund (in the top
tercile of the sample).

51

 Appendix A. Derivations and Proofs

(i) We first show the derivation of equation (10). From equation (9),

[P0 + T S]μT = [P0 μ0 + T SRT ]

= [P0 μ0 + S((T − 1)RT −1 + RT )]
= [P0 μ0 + S(T − 1)RT −1 ] + SRT
= [P0 + (T − 1)S]μT −1 + SRT
= [P0 + T S]μT −1 + S[RT − μT −1 ]
 
c(q1,T −1 )
= [P0 + T S]μT −1 + S[RT − ] , from equation (8)
c(q2,T −1 )
= [P0 + T S]μT −1 + SrT , from equation (3)
That is, μT = μT −1 + [P0 + T S]−1 SrT . (10)

(ii) Equation (12) is derived as follows. The precision matrices, S ≡ Ω−1 and P0 ≡ Σ0 −1 ,
are equal to
 −1  
1
V1 0 0
S ≡ Ω−1 = = V1 1 ;
0 V2 0 V2
 −1  
W1 W12 1 W2 −W12
P0 ≡ Σ−1
0 = = ;
W12 W2 d −W12 W1

2
where d = W1 W2 − W12 .
From equation (11),
 
c(q1T ) − c(q1,T −1 )
= μT − μT −1 = [P0 + T S]−1 SrT
c(q2T ) − c(q2,T −1 )
 −1  
W2
d
+ T
V1
− W12
d
r1T
V1
=
− Wd12 W1
d
+ T
V2
r2T
V2
 −1  
1 −1 W2 + TV1d −W12 r1T
V1
=( )
d −W12 W1 + V2 Td r2T
    V2
Td r1T
d W1 + V2 W12 V1
= Td r2T
; (A1)
Δ W12 W2 + V1 V2

52
 Td Td 2
where Δ = (W1 + )(W2 + ) − W12
V2 V1
2 2
2 T d W1 W 2
= W1 W2 − W12 + + T d( + )
V1 V2 V1 V2
T 2 d2 W1 W2
=d+ + T d( + ) > 0.
V1 V2 V1 V2

For Fund 1,
c(q1T ) − c(q1,T −1 ) = A1 r1T + A2 r2T ; (12)

Td
d W1 + V2
where A1 = ;
Δ V1
d W12
A2 = .
Δ V2

(iii) Proof of Proposition 1: Since d and Δ are determinants of matrices, they must be
positive. All the other terms in A1 are positive by definition. A2 is positive as long as
the covariance of the beliefs, W12 , is positive.

(iv) Proof of Proposition 2: Again for Fund 1,

Td Td
d W1 + V2
W1 + V2
A1 = = T 2d
;
Δ V1 V1 [1 + V1 V2
+ T (W 1
V1
+ W2
V2
)]
d W12 W12
A2 = = T 2d
; (A2)
Δ V2 V2 [1 + V1 V2
+ T (W
V1
1
+ W2
V2
)]

2
where d = W1 W2 − W12 . As W12 increases, d decreases; the numerator of A2 increases
and the denominator decreases. A2 should be higher (more positive) if W12 is more
positive.
The relationship between A1 and W12 is given by

∂A1 ∂A1
Sign( ) = Sign(V1 )
∂d ∂d
2 Td T2
[1 + VT1 Vd2 + T ( W
V1
1
+WV2
2
)] VT2 − (W1 + )
V2 V1 V2
= Sign( 2 )
[1 + VT1 Vd2 + T ( WV1
1
+W 2
V2
)]2
[1 + T W 2 T
]
V2 V2
= Sign( T 2d W2 2
) > 0.
[1 + V1 V2
+ T (W
V1
1
+ V2
)]

2
Again, d = W1 W2 − W12 . Therefore, A1 increases with d and decreases with W12 .

53
 (v) Proof of Proposition 3: From equation (A2), A2 increases with V1 (the variance of R1t )
as the denominator decreases; A1 decreases with V1 as the denominator increases.
Also from equation (A2), A2 decreases with V2 (the variance of R2t ) as the denominator
increases.
The relationship between A1 and V2 is given by

∂A1 ∂A1
Sign( ) = Sign(V1 )
∂V2 ∂V2
T 2d W1 W2 T d T d 1 T 2d
= Sign(−[1 + + T( + )] 2 + (W1 + ) ( + T W2 ))
V1 V2 V1 V2 V2 V2 V22 V1
T d T 3 d2 T 2 dW1 T 2 dW2 T 2 dW1 T W1 W2 T 3 d2 T 2 dW2
= Sign(− 2 − − − + + + + )
V2 V1 V23 V1 V22 V23 V1 V22 V22 V1 V23 V23
T d T W1 W2
= Sign(− 2 + )
V2 V22
T
= Sign( 2 (W1 W2 − d))
V2
2
= Sign(W1 W2 − W1 W2 + W12 ) > 0.

(vi) Proof of Proposition 4: From equation (A2), A2 decreases with T as the denominator
increases. The relationship between A1 and T is given by

∂A1 ∂A1
Sign( ) = Sign(V1 )
∂T ∂T
T 2d W1 W2 d T d 2T d W1 W2
= Sign([1 + + T( + )] − (W1 + )( + + ))
V1 V2 V1 V2 V2 V2 V1 V2 V1 V2
d T 2 d2 T dW1 T dW2 2T dW1 W12 W1 W2 2T 2 d2 T dW1 T dW2
= Sign( + + + − − − − − − )
V2 V1 V22 V1 V2 V22 V1 V2 V1 V2 V1 V22 V1 V2 V22
d T 2 d2 2T dW1 W12 W1 W2
= Sign( − − − − )
V2 V1 V22 V1 V2 V1 V2
T 2 d2 2T dW1 W12 W1 W2 − d
= Sign(− − − − )
V1 V22 V1 V2 V1 V2
T 2 d2 2T dW1 W12 W12 2
= Sign(− − − − ) < 0.
V1 V22 V1 V2 V1 V2

Appendix B. Extension: Learning with Frictions

In this extension, the investor’s expectation operator, E I [.] is different from the fully
rational and frictionless (“true”) expectation operator, E[.]. The former is the expectations

54
operator under investors’ beliefs and information sets. We discuss three possible channels
for investor learning to be not fully rational and frictionless. First, transactions costs such
as front-end and back-end loads make it more costly for investors to allocate their capital
accord to the signals. The second channel refers to investors operating under an incomplete
(not completely updated) information set and having to use the last available information,
which might differ from current information. The third channel is about investors believing
(incorrectly) that the optimal update rule involves putting a weight on their prior which
turns out to be “too high” under Bayesian rules.

From investors’ point of view, they still try to competitively allocate capital to funds so
that all funds earn zero expected excess net returns, under their expectations. Therefore,

ETI [ri,T +1 ] = 0,
 
R 1,T +1 − c(q 1T ) C(qit )
i.e., ETI [ ] = 0, where c(qit ) ≡ + f;
R2,T +1 − c(q2T ) qit
 
c(q 1T )
ETI [RT +1 ] = . (A3)
c(q2T )

Denote the expected gross returns under the investors’ beliefs and information at time T as
μIT . We have  
c(q 1T )
μIT ≡ ETI [RT +1 ] = . (A4)
c(q2T )

These equations correspond to equations (6)–(8) in Section I.A. Recall that under the
fully rational and frictionless model in Section I, from equation (13) we have

μT = {I − M }μT −1 + M RT , (A5)

where M = [P0 + T S]−1 S. To reflect overweighting on priors and underweighting on new

information, we modify equation (A5):

μIT = {I − kM }μIT −1 + kM RT
= μIT −1 + kM [RT − μIT −1 ], (A6)

55
where 0 < k < 1.31 Applying equation (A4),
 
c(q 1,T −1 )
μIT = μIT −1 + kM [RT − ]
c(q2,T −1 )
= μIT −1 + kM rT , from equation (3) (A7)

This corresponds to equation (10) in Section I.A, specifying how investors update the poste-
 
rior means of their beliefs on ψψ12 . We are again interested in investors’ flows into and out
of Funds 1 and 2. As in Section I.A, we examine the change in the unit cost. From equations
(A4) and (A7),
 
c(q1T ) − c(q1,T −1 )
= kM rT
c(q2T ) − c(q2,T −1 )
  
r1T
d W1 + TV2d W12 V1
=k r2T
, from equation (A1) (A8)
Δ W12 W2 + TV1d V2

For Fund 1,
d T d r1T r2T
c(q1T ) − c(q1,T −1 ) = k [(W1 + ) + W12 ]. (A9)
Δ V2 V1 V2
To simplify the exposition that follows, several additional assumptions and notations are
used. First, we assume that the size of the funds, q, at time T − 1 is the same across the
two models: the fully rational and frictionless model in Section I.A and the model extension
with frictions here. Second, we denote the size of the fund at time T as q R and q I , for the
models in Section I.A and here, respectively.

As argued in Section I.A, flows into Fund 1 are monotonically increasing in the change
in the unit cost. Denote the change in the unit cost under the rational and frictionless
R
equilibrium as F1T . From equation (12), flows into Fund 1 at time T under the rational and
frictionless equilibrium are increasing in

d T d r1T r2T
R
F1T ≡ c(q1T
R
) − c(q1,T −1 ) = [(W1 + ) + W12 ]
Δ V2 V1 V2
= A1 r1T + A2 r2T . (A10)

I
Denote the change in the unit cost under the equilibrium with frictions as F1T . From equation
31
While we model the biased update in a multiplicative manner (kM ), modeling it in an additive way
(e.g., M − kI) gives the same conclusion.

56
(A9), flows into Fund 1 at time T under the equilibrium with frictions are increasing in

I I d T d r1T r2T
F1T ≡ c(q1T ) − c(q1,T −1 ) = k [(W1 + ) + W12 ]
∆ V2 V1 V2
= kA1 r1T + kA2 r2T . (A10’)

Recall that 0 < k < 1 captures the degree of overweighting on the prior and underweighting
on new information (a smaller k indicates a larger deviation from the rational and frictionless
benchmark). Therefore, the responses in flows to the own fund and to other fund are more
insufficient as k is smaller. Note that, however, the cross-sectional predictions from our
baseline model (Propositions 2 to 4) still hold, even under the updating rule in equation
(A6).

Now, we consider the return on Fund 1. From equation (3), r1,T +1 = R1,T +1 − c(q1T ) =
R1,T +1 − cq1,T − f . The “true” expected future excess net return under fully rational and
frictionless conditions is

R
E[r1,T +1 ] = E[R1,T +1 ] − c(q1T ) − f = 0. (A11)

On the other hand, the true expected future excess net return under investors’ updating rule
in equation (A6) is

I
E[r1,T +1 ] = E[R1,T +1 ] − c(q1T )−f
R R I
= E[R1,T +1 ] − c(q1T ) − f + c(q1T ) − c(q1T )
R I
= c(q1T ) − c(q1T )
R I
= F1T + c(q1,T −1 ) − F1T − c(q1,T −1 )
= (1 − k)A1 r1T + (1 − k)A2 r2T . (A12)

As 0 < k < 1, we will observe positive own-fund and positive cross-fund predictability.

Although we do not model the underlying investor behavior and the incomplete informa-
tion environment, related papers indicate that equation (A6) is a reasonable approximation.
The parameter k parsimoniously captures the behavioral bias that investors place too much
weight on priors, and Brav and Heaton (2002) show that this is analogous to a case where
rational investors do not have complete information of the fundamentals.

57
 Appendix C. Procedures for Constructing a Placebo
Sample

Let F1 be the fund in quesion and F2 be the manager’s other fund. We find a control fund,
M2, that matches F2 based on family information and fund characteristics. In particular,
when each multi-fund manager starts managing two funds, we find a match from the universe
of single-manager funds using the following:

(i) We pick funds (in the same month) that come from the same family and whose assets
are 25%–200% of the multi-fund manager’s fund F2.

(ii) In the event that there is no eligible fund in (i) (family information is missing, or there
are no family funds with 25%–200% assets), we pick funds (in the same month) whose
assets are 90%–110% of the multi-fund manager’s fund F2.32

(iii) From all eligible funds we calculate a score.

Eligible Fund’s Standard Deviation

Score = abs( − 1)
Standard Deviation
Eligible Fund’s Fund Age
+ abs( − 1)
Fund Age
Eligible Fund’s Expense
+ abs( − 1).
Expense

We pick the fund with the lowest Score to be M2. The same M2 is used throughout the
manager’s tenure in the two funds.

32
The results are robust if we skip this step and only use same-family funds. The flow-performance
results and the cross-fund predictability results using same-family placebo funds are reported in the Internet
Appendix (Table IA.VIII).

58
 Learning About Mutual Fund Managers

Internet Appendix

Darwin Choi, HKUST

Bige Kahraman, Saı̈d Business School, University of Oxford

Abhiroop Mukherjee, HKUST?

This Internet Appendix contains various robustness tests.

First, an alternative definition of F lowit is used as the dependent variable in the flow-
performance regression (equation (15)):

T N Ait − T N Ai,t−1 (1 + Rit )

F lowit = .
T N Ai,t−1 (1 + Rit )

Flows will not be lower than −100% using this measure. Table IA.I repeats Column
(1)–(4) in Table III, and the results are very similar.

We then use a Fama-Macbeth framework to run the flow-performance regressions in Table

IA.II. Months with less than 25 observations are excluded. Table IA.III conducts further
checks: Columns (1) and (2) use the sample of managers that have two funds only (which
constitute about 85% of the full sample), while Columns (3) and (4) use style-adjusted
returns instead of four-factor alphas as performance variables. The style-adjusted return is
calculated as the monthly return on the fund, in excess of the average return on all funds
in the same CRSP investment objective code from the prior 12 months. The variables Low,
M id, and High of the funds are defined based on the fractional performance rank in style-
adjusted returns. As in Table III, Tables IA.II and IA.III show that flows into a fund are
?
Author Contact Information: Darwin Choi, Hong Kong University of Science and Technology, Clear
Water Bay, Kowloon, Hong Kong, dchoi@ust.hk. Bige Kahraman, Park End Street, Oxford OX1 1HP,
United Kingdom, bige.kahraman@sbs.ox.ac.uk. Abhiroop Mukherjee, Hong Kong University of Science
and Technology, Clear Water Bay, Kowloon, Hong Kong, amukherjee@ust.hk

1
predicted by past performance in the manager’s other fund, particularly when the other fund
has performed particularly well.

Table IA.IV uses flows into funds in the same style (StyleF low) as an alternative control
variable, replacing ObjF low (average flows into funds in the same objective) in Table III.
We do this in case some funds follow investment styles that are different from the objectives
stated in their prospectus. StyleF low is the average flows into funds in the same style group
in month t. The style group is defined by the estimated Carhart (1997) four-factor loadings:
for each factor loading, we independently divide all CRSP funds into above and below the
sample median in month t; so there are a total of 24 = 16 style groups. We report in Table
IA.IV the panel regressions using StyleF low as an independent variable, as well as the panel
regressions using style-adjusted flows (defined as Flows minus StyleF low) as the dependent
variable. The results are similar to those in Table III.

As noted in footnote 14 in the main text, related studies in this literature have used a
number of data sources to identify fund managers, and CRSP is one of them. While recent
work points out the problems with CRSP, some of their concerns do not apply to our paper
because we have hand-cleaned our data using public information available outside of CRSP:
we take into account spelling differences and format changes, as well as look up information
on funds and managers from the Internet, as in Kacperczyk and Seru (2007). Here we conduct
a robustness check by validating the information from our data with that from Morningstar
Direct. To merge CRSP with Morningstar Direct, we follow the procedure described by
Pastor, Stambaugh, and Taylor (2015), which requires information on a fund’s ticker, CUSIP,
and name. We repeat our main flow-performance and return regressions (equations (15) and
(16)) using a new sample where our cleaned CRSP data agree with Morningstar Direct. The
results are reported in Table IA.V. Our conclusions remain unchanged.

Table IA.VI runs the return regression (equation (16)) using one-month-ahead risk factor-

2
adjusted return as the dependent variable, instead of StyleAdjustedReturnt+1 :

RiskAdjustedReturnt+1 = rt+1 − (βM KT M KTt+1 + βSM B SM Bt+1 + βHM L HM Lt+1

+ βU M D U M Dt+1 ).

rt+1 is the raw return of fund i in month t + 1 (the subscript i is dropped). The factor
loadings, β, are estimated using the Carhart (1997) model that also calculates Alpha. The
results are very similar to those in Table X.

Table IA.VII repeats the double portfolio sort in Table VIII, Panel A for a 1-month
holding period. All Fund 2s are sorted into terciles based on their past four-factor alphas.
Within each tercile, we then sort funds into quintiles based on the past alphas of the man-
ager’s Fund 1. The portfolio alphas are then calculated using the entire sample period. All
portfolio alphas are shown, without averaging across terciles. We see that the results come
mostly from terciles 1 and 2 (the lower two terciles).

Finally, Table IA.VIII shows the placebo results using same-family funds that are man-
aged by different managers. In Sections III.C and IV.B, for funds that have no family
information or no eligible same-family funds, we use a matching fund that has similar char-
acteristics. Here we require that the matching fund comes from the same family. As in the
main text (Table VI Columns (3) and (4) and Table IX, Panel C), we do not see a significant
cross-fund flow-performance relationship and cross-fund predictability.

3
Table IA.I. Flow-Performance Regression in Multi-Funds: Using an Alternative Flow Definition
This table presents the results from flow-performance regressions using an alternative flow definition:
்ே஺೔೟ ି்ே஺೔ǡ೟షభ ሺଵାோ೔೟ ሻ
‫ݓ݋݈ܨ‬௜௧ ൌ . In columns (3) and (4), we use a piecewise linear specification. For each
்ே஺೔ǡ೟షభ ሺଵାோ೔೟ ሻ
month, we assign a fractional rank from 0 (worst) to 1 (best) to each fund, and define: Low Alpha =
Min(Rank , 0.2), Mid Alpha = Min(0.6, Rank – Low Alpha), and High Alpha = Rank – Mid Alpha – Low
Alpha. Standard errors are clustered at the manager level. All other variables are defined in Table XIII. *, **,
and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2) (3) (4)

Alpha 0.4206*** 0.7595***

(0.0514) (0.1637)
Alpha2 0.0738** 0.0823**
(0.0371) (0.0368)
Low Alpha 0.0174*** 0.0164**
(0.0059) (0.0068)
Mid Alpha 0.0084*** 0.0094***
(0.0015) (0.0017)
High Alpha 0.0387*** 0.0475***
(0.0100) (0.0119)
Low Alpha2 0.0102 0.0063
(0.0067) (0.0075)
Mid Alpha2 -0.0025 -0.0029
(0.0017) (0.0019)
High Alpha2 0.0204** 0.0232***
(0.0082) (0.0089)
Alpha x Stdret -1.7290*
(1.0161)
Alpha x ln (Age) -0.0990**
(0.0467)
ln (Age) -0.0009** -0.0010*** -0.0009** -0.0001
(0.0004) (0.0004) (0.0004) (0.0006)
ln (FundSize) -0.0003* -0.0003 -0.0003 -0.0021***
(0.0002) (0.0002) (0.0002) (0.0004)
Expense 0.0723 0.0735 0.0709 -0.0132
(0.0576) (0.0573) (0.0580) (0.1010)
Stdret -0.0347** -0.0341** -0.0424** -0.0124
(0.0170) (0.0166) (0.0169) (0.0448)
Obj Flow 0.2898*** 0.2924*** 0.2884*** 0.4134***
(0.0552) (0.0558) (0.0561) (0.0675)
Constant 0.0079 0.0084 -0.0009 0.0131*
(0.0054) (0.0054) (0.0055) (0.0072)

Observations 19,538 19,538 19,538 19,538

R-squared 0.355 0.355 0.355 0.266
Past Flows Yes Yes Yes Yes
Manager FE No No No Yes
Year-Month FE Yes Yes Yes Yes

4

Table IA.II. Flow-Performance Regression in Multi-Funds using Fama-MacBeth Regressions
This table presents the results from flow-performance regressions using Fama-Macbeth regressions. The
dependent variable, Flow, is the proportional monthly growth in total assets under management. Alpha and
Alpha2 are the risk-adjusted returns of the fund and of the other fund. In column (4), we use a piecewise
linear specification. For each month, we assign a fractional rank from 0 (worst) to 1 (best) to each fund, and
define: Low Alpha = Min(Rank , 0.2), Mid Alpha = Min(0.6, Rank – Low Alpha ), and High Alpha = Rank –
Mid Alpha – Low Alpha . We use Newey-West standard errors with 6 lags. All other variables are defined in
Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

VARIABLES (1) (2) (3)

Alpha 0.4401*** 1.8951***

(0.0633) (0.3955)
Alpha2 0.1468*** 0.1468**
(0.0539) (0.0612)
Low Alpha 0.0176**
(0.0083)
Mid Alpha 0.0061***
(0.0015)
High Alpha 0.0376***
(0.0105)
Low Alpha2 0.0030
(0.0071)
Mid Alpha2 0.0003
(0.0017)
High Alpha2 0.0152**
(0.0076)
Alpha x Stdret -13.1980***
(4.2961)
Alpha x ln (Age) -0.2702***
(0.0920)
ln (Age) -0.0014** -0.0014** -0.0013**
(0.0005) (0.0005) (0.0006)
ln (FundSize) -0.0005** -0.0005** -0.0004
(0.0002) (0.0002) (0.0003)
Expense 0.0305 0.0468 0.0405
(0.0554) (0.0537) (0.0620)
Stdret 0.0080 -0.0276 -0.0188
(0.0398) (0.0470) (0.0403)
Obj Flow 0.2501 0.2513 0.2312
(0.3357) (0.3397) (0.3136)
Constant 0.0106*** 0.0107*** 0.0033
(0.0034) (0.0033) (0.0039)

Observations 19,309 19,309 19,309

R-squared 0.545 0.570 0.577
Past Flows Yes Yes Yes

5

Table IA.III. Flow-Performance Regression in Multi-Funds: Further Checks
This table presents further checks for the results of flow-performance regressions using ordinary least
squares. Column (1) and (2) use the sample of managers that have only two funds; Column (3) and (4) use
style-adjusted returns instead of four-factor alphas as performance variables. The dependent variable, Flow, is
the proportional monthly growth in total assets under management. We use a piecewise linear specification.
For each month, we sort funds based on their performances and assign a fractional rank from 0 (worst) to 1
(best). Then, we define: Low Perf = Min(Rank , 0.2), Mid Perf = Min(0.6, Rank – Low Perf), and High Perf
= Rank – Mid Perf – Low Perf. In column (1) and (2) we sort on four-factor alphas, and in Column (3) and
(4) we sort on style-adjusted returns. Standard errors are clustered at the manager level. All other variables are
defined in Table XIII. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

(1) (2) (3) (4)

VARIABLES Alpha Alpha Style-Adj Style-Adj

Perf 0.3830*** 0.4374***

(0.0537) (0.0441)
Perf2 0.0715* 0.0634*
(0.0407) (0.0364)
Low Perf 0.0143** 0.0139**
(0.0059) (0.0061)
Mid Perf 0.0089*** 0.0166***
(0.0016) (0.0017)
High Perf 0.0300*** 0.0485***
(0.0096) (0.0109)
Low Perf2 0.0109 0.0017
(0.0072) (0.0063)
Mid Perf2 -0.0018 0.0000
(0.0017) (0.0015)
High Perf2 0.0150** 0.0177*
(0.0076) (0.0101)
ln (Age) -0.0008** -0.0008** -0.0011*** -0.0011***
(0.0004) (0.0004) (0.0004) (0.0004)
ln (FundSize) -0.0005** -0.0005** -0.0004** -0.0004**
(0.0002) (0.0002) (0.0002) (0.0002)
Expense 0.0204 0.0249 0.0956*** 0.0905***
(0.0597) (0.0605) (0.0100) (0.0092)
Stdret -0.0321* -0.0406** -0.0108 -0.0455**
(0.0174) (0.0176) (0.0205) (0.0196)
Obj Flow 0.2908*** 0.2922*** 0.2908*** 0.3090***
(0.0610) (0.0610) (0.0579) (0.0576)
Constant 0.0127*** 0.0042 -0.0129*** -0.0190***
(0.0049) (0.0050) (0.0017) (0.0024)

Observations 17,200 17,200 18,991 18,991

R-squared 0.371 0.372 0.354 0.358
Past Flows Yes Yes Yes Yes
Manager FE No No No No
Year-Month FE Yes Yes Yes Yes

6

Table IA.IV. Flow-Performance Regression in Multi-Funds: Controlling for Style Chasing
This table presents the results from flow-performance regressions controlling for Style Flow. Style Flow is the
average flows into funds in the same style group in month t where the style group is defined by the estimated
Carhart (1997) four-factor loadings. In columns (1)-(4), the dependent variable is Flow, which is the
proportional monthly growth in total assets under management; the dependent variable in columns (5)-(8) is
Adjusted Flow which is the Flow minus the Style Flow of the fund’s style. Columns (1)-(4) includes Style
Flow as an independent variable. Alpha and Alpha2 are the risk-adjusted returns of the fund and of the other
fund. In columns (3)-(4) and (7)-(8), we use a piecewise linear specification. For each month, we assign a
fractional rank from 0 (worst) to 1 (best) to each fund, and define: Low Alpha = Min(Rank , 0.2), Mid Alpha
= Min(0.6, Rank – Low Alpha), and High Alpha = Rank – Mid Alpha – Low Alpha. Standard errors are
clustered at the manager level. All other variables are defined in Table XIII. *, **, and *** denote 10%, 5%,
and 1% significance, respectively.

7

 Flow Adjusted Flow
VARIABLES (1) (2) (3) (4) (5) (6) (7) (8)

Alpha 0.4018*** 0.6961*** 0.3852*** 0.6484***

(0.0475) (0.1604) (0.0477) (0.1583)
Alpha2 0.0762** 0.0846** 0.0775** 0.0849**
(0.0369) (0.0367) (0.0376) (0.0374)
Low Alpha 0.0168*** 0.0163** 0.0165*** 0.0164**
(0.0057) (0.0066) (0.0056) (0.0066)
Mid Alpha 0.0084*** 0.0094*** 0.0079*** 0.0089***
(0.0014) (0.0016) (0.0014) (0.0016)
High Alpha 0.0363*** 0.0446*** 0.0360*** 0.0437***
(0.0094) (0.0111) (0.0095) (0.0112)
Low Alpha2 0.0114* 0.0079 0.0124* 0.0091
(0.0066) (0.0075) (0.0066) (0.0075)
Mid Alpha2 -0.0025 -0.0029* -0.0025 -0.0029
(0.0016) (0.0018) (0.0016) (0.0018)
High Alpha2 0.0194** 0.0220** 0.0184** 0.0208**
(0.0079) (0.0086) (0.0080) (0.0086)
Alpha x Stdret -2.0977** -1.7942*
(0.9356) (0.9168)
Alpha x ln (Age) -0.0668 -0.0623
(0.0455) (0.0455)
ln (Age) -0.0009** -0.0009** -0.0008** -0.0000 -0.0009*** -0.0010*** -0.0009** -0.0001
(0.0004) (0.0004) (0.0004) (0.0006) (0.0003) (0.0004) (0.0003) (0.0006)
ln (FundSize) -0.0005** -0.0004** -0.0004** -0.0023*** -0.0004** -0.0004* -0.0004* -0.0022***
(0.0002) (0.0002) (0.0002) (0.0004) (0.0002) (0.0002) (0.0002) (0.0004)
Expense 0.0548 0.0569 0.0542 -0.0463 0.0568 0.0585 0.0558 -0.0512
(0.0545) (0.0544) (0.0550) (0.0963) (0.0549) (0.0548) (0.0554) (0.0952)
Stdret -0.0263 -0.0236 -0.0327* 0.0046 -0.0190 -0.0170 -0.0251 0.0153
(0.0175) (0.0169) (0.0175) (0.0423) (0.0175) (0.0170) (0.0175) (0.0417)
Style Flow 0.4640*** 0.4631*** 0.4631*** 0.4912***
(0.0408) (0.0406) (0.0405) (0.0452)
Constant 0.0077 0.0082 -0.0011 0.0154** 0.0097* 0.0100* 0.0009 0.0171**
(0.0053) (0.0053) (0.0054) (0.0073) (0.0057) (0.0058) (0.0058) (0.0077)

Observations 19,538 19,538 19,538 19,538 19,538 19,538 19,538 19,538

R-squared 0.372 0.373 0.373 0.284 0.326 0.326 0.326 0.238
Past Flows Yes Yes Yes Yes Yes Yes Yes Yes
Manager FE No No No Yes No No No Yes
Year-Month FE Yes Yes Yes Yes Yes Yes Yes Yes

8

Table IA.V. Robustness Check with Morningstar
This table presents the results Panel A presents results from flow-performance regressions using the same
methodology as in Table III (columns (1)-(4)). In this panel, the dependent variable is Flow, which is the
proportional monthly growth in total assets under management; Alpha and Alpha2 are the risk-adjusted
returns of the fund itself and of the other fund. In columns (3)-(4), we use a piecewise linear specification.
For each month, we assign a fractional rank from 0 (worst) to 1 (best) to each fund, and define: Low Alpha =
Min(Rank, 0.2), Mid Alpha = Min(0.6, Rank – Low Alpha), and High Alpha = Rank – Mid Alpha – Low
Alpha. Standard errors are clustered at the manager level. Panel B presents the results of the predictive
regressions of future performance on past performance, using the same methodology as Table X (column
(1)). The dependent variable in column (1) is Style-Adjusted Return, and in column (2) is Risk Adjusted
Return -- the raw return minus the factor loadings times realized factor premiums in the next month. The
factor loadings are estimated from the preceding 12 months using Carhart (1997) four-factor model.
AlphaRank and Alpha2Rank are fractional performance ranks, ranging from 0 (worst) to 1 (best), based on
the 4-factor alphas in the 2 funds. In this panel, we present Fama-Macbeth estimates with Newey-West
standard errors. All other variables are defined in Table XIII. Throughout this table *, **, and *** denote
10%, 5%, and 1% significance, respectively.

9

Panel A: Flow-Performance Regression in Multi-Funds

Flow
VARIABLES (1) (2) (3) (4)

Alpha 0.4263*** 0.6894***

(0.0576) (0.1851)
Alpha2 0.0988** 0.1067**
(0.043) (0.0425)
Low Alpha 0.0111 0.0084
(0.0069) (0.0074)
Mid Alpha 0.0098*** 0.0114***
(0.0017) (0.0019)
High Alpha 0.0397*** 0.044***
(0.0107) (0.0121)
Low Alpha2 0.0124* 0.0081
(0.0068) (0.0078)
Mid Alpha2 -0.0022 -0.0026
(0.0017) (0.0019)
High Alpha2 0.0188** 0.0189**
(0.0089) (0.0096)
Alpha x Stdret -2.1567**
(1.0735)
Alpha x ln (Age) -0.0494
(0.0502)
ln (Age) -0.0009** -0.001** -0.001** 0.0000
(0.0004) (0.0004) (0.0004) (0.0007)
ln (FundSize) -0.0004* -0.00037 -0.00036 -0.0022***
(0.0002) (0.00023) (0.00023) (0.0005)
Expense 0.0177 0.0209 0.0174 0.0406
(0.0614) (0.0611) (0.0602) (0.1119)
Stdret -0.0093 -0.0041 -0.0174 -0.021
(0.02) (0.0187) (0.0195) (0.051)
Obj Flow 0.4531*** 0.4527*** 0.4517*** 0.4889***
(0.049) (0.0487) (0.0485) (0.0535)
Constant 0.0059 0.0062 -0.0033 0.0157*
(0.0061) (0.0062) (0.0063) (0.0089)

Observations 15,096 15,096 15,096 15,096

R-squared 0.368 0.369 0.369 0.273
Past Flows Yes Yes Yes Yes
Manager FE No No No Yes
Year-Month FE Yes Yes Yes Yes

10

Panel B: Regressions of Future Performance on Past Performance

(1) (2)
VARIABLES Style-Adjusted Return Risk-Adjusted Return

AlphaRank 0.0029 0.0056**

(0.0018) (0.0024)
Alpha2Rank 0.0036** 0.0029*
(0.0018) (0.0017)
ln (Age) -0.0003 -0.0001
(0.0005) (0.0005)
ln (FundSize) -0.0003 -0.0001
(0.0002) (0.0002)
Expense -0.0892** -0.1176***
(0.0453) (0.041)
Stdret 0.0845 0.08
(0.0651) (0.0498)
Obj Flow -0.1995 -0.0119
(0.1602) (0.2183)
Constant -0.0023 -0.0072**
(0.0036) (0.0031)
Observations 14,797 14,797
R-squared 0.42 0.379
Past Flows Yes Yes

11

Table IA.VI. Regression of Future Performance on Past Performance: Alphas as Dependent Variables
This table presents the results of the predictive regressions of future performance on past performance. The
dependent variable, Risk Adjusted Return, is the raw return minus the factor loadings times realized factor
premiums in the next month. The factor loadings are estimated from the preceding 12 months using Carhart
(1997) four-factor model. Alpha and Alpha2 are the risk-adjusted returns estimated using Carhart (1997) four
factor model and AlphaRank and Alpha2Rank are fractional performance ranks, ranging from 0 (worst) to 1
(best). Low Rank and Low Rank2 indicate, respectively, that the own fund and the other fund are in the
lowest two performance quintiles. Alpha rank variables are interacted with dummy variables: Uncommon,
indicating that the two funds’ portfolio overlap is below the sample median; Highcorr, indicating that the
correlation of the two funds’ past 4-factor risk-adjusted return is above the sample median. Loads is a dummy
variable that indicates whether the fund has any front-end or back-end loads. The dummy variable, High12b1,
indicates high 12b-1 fees charged by the other fund (in the top tercile of the sample). We present Fama-
Macbeth estimates with Newey-West standard errors. All other variables are defined in Table XIII. *, **, and
*** denote 10%, 5%, and 1% significance, respectively.

12

VARIABLES (1) (2) (3) (4) (5) (6)

AlphaRank 0.0052** 0.0049*** 0.0055*** 0.0051** 0.0079***

(0.0020) (0.0018) (0.0018) (0.0020) (0.0031)
Alpha2Rank 0.0023** 0.0017 0.0039** 0.0024** 0.0036*
(0.0011) (0.0019) (0.0019) (0.0014) (0.0021)
Low Rank -0.0019***
(0.0007)
Low Rank2 -0.0010*
(0.0006)
Alpha2Rank x Uncommon 0.0026**
(0.0013)
Alpha2Rank x Highcorr -0.0020
(0.0023)
Alpha2Rank x Loads 0.0007
(0.0016)
Alpha2Rank x High12b1 -0.0024*
(0.0015)
Uncommon 0.0008
(0.0011)
Highcorr 0.0010
(0.0015)
Loads -0.0006
(0.0010)
High12b1 0.0187
(0.0133)
ln (Age) 0.0002 0.0002 0.0001 0.0003 0.0001 0.0001
(0.0004) (0.0004) (0.0004) (0.0004) (0.0004) (0.0006)
ln (FundSize) -0.0002 -0.0002 -0.0001 -0.0003 -0.0002 -0.0005*
(0.0002) (0.0002) (0.0002) (0.0002) (0.0002) (0.0003)
Expense -0.0715** -0.0935** -0.0801* -0.0662** -0.0593 -0.1693
(0.0355) (0.0347) (0.0431) (0.0328) (0.0500) (0.1444)
Stdret 0.0806 0.0639 0.0534 0.0677 0.0549 -0.1019
(0.0609) (0.0481) (0.0504) (0.0474) (0.0482) (0.1789)
Obj flow 0.1559 0.2419 0.0656 0.0455 0.1393 -0.0588
(0.3020) (0.3205) (0.3258) (0.2823) (0.2973) (0.2207)
Constant -0.0060* -0.0004 -0.0071** -0.0071* -0.0054* -0.0071
(0.0031) (0.0032) (0.0035) (0.0038) (0.0030) (0.0060)

Observations 19,372 19,372 17,754 19,372 19,372 14,104

R-squared 0.337 0.307 0.387 0.370 0.363 0.453
Past Flows Yes Yes Yes Yes Yes Yes

13

Table IA.VII. Portfolios Formed Based on Past Performance in Both Funds: For Each Tercile
We present the full matrix of the conditional double sort results presented in Panel A, Table VIII. Panel A, B
and C shows the results within Tercile 1, 2, and 3, respectively. We use Newey-West standard errors with 3
lags; t-statistics are presented in parenthesis. *, **, and *** denote 10%, 5%, and 1% significance, respectively.

Panel A. Tercile 1 (Lowest)

Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0019 (-0.93) -0.0034* (-1.79) -0.0035** (-2.09) -0.0024 (-1.59)
2 -0.0025* (-1.84) -0.0026** (-2.22) -0.0026** (-2.30) -0.0017 (-1.59)
3 -0.0012 (-0.74) -0.0021** (-2.22) -0.0020** (-2.48) -0.0019*** (-2.60)
4 -0.0021 (-1.52) -0.0024 (-2.39) -0.0023*** (-3.00) -0.0021*** (-2.61)
5 (Highest) 0.0014 (0.83) 0.0022 (1.57) 0.0014 (1.21) -0.0001 (-0.05)
5-1 0.0033 (1.49) 0.0056*** (2.83) 0.0049*** (2.88) 0.0023 (1.59)

Panel B. Tercile 2
Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0036** (-2.39) -0.0019 (-1.46) -0.0011 (-0.89) -0.0008 (-0.76)
2 -0.0017* (-1.92) -0.0014** (-2.32) -0.0012** (-2.17) -0.0012** (-2.09)
3 -0.0008 (-1.02) -0.0006 (-0.87) -0.0009 (-1.46) -0.0010* (-1.65)
4 -0.0009 (-0.88) -0.0010 (-1.29) -0.0004 (-0.51) -0.0008 (-1.29)
5 (Highest) -0.0006 (-0.57) -0.0010 (-1.34) -0.0011 (-1.35) -0.0010 (-1.31)
5-1 0.0030* (1.78) 0.0008 (0.00) 0.0001 (-0.02) -0.0002 (-0.31)

Panel C. Tercile 3 (Highest)

Holding Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) 0.0022 (1.28) 0.0023 (1.60) 0.0019 (1.38) 0.0017 (1.58)
2 -0.0001 (0.19) 0.0003 (0.03) 0.0004 (0.16) 0.0001 (-0.10)
3 0.0007 (0.10) 0.0003 (-0.06) 0.0003 (0.14) 0.0006 (0.24)
4 -0.0010 (-0.41) 0.0010 (0.62) -0.0001 (-0.02) 0.0001 (-0.03)
5 (Highest) 0.0043** (2.07) 0.0026 (1.61) 0.0022 (1.13) 0.0012 (0.57)
5-1 0.0020 (0.72) 0.0005 (0.10) 0.0003 (-0.11) -0.0005 (-0.72)

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Table IA.VIII. Main Results using Placebo Sample 2 (Conditioning on Same Family)

Panel A. Flow-Performance Regression using Placebo Sample 2 (Conditioning on Same Family)

This table presents the results from the flow-performance regressions using a placebo sample where we
replace one of the manager’s funds (F2) with another fund that is in the same fund family and with similar
characteristics. The dependent variable is Flow. In column (2), we use a piecewise linear specification. For
each month, we rank each fund based on their alphas and assign a fractional rank from 0 (worst) to 1 (best).
Then, we define: Low Alpha = Min(Rank , 0.2), Mid Alpha = Min(0.6, Rank – Low Alpha ), and High Alpha
= Rank – Mid Alpha – Low Alpha . We present results using ordinary least squares with errors clustered at
the manager level. All other variables are defined in Table XIII. *, **, and *** denote 10%, 5%, and 1%
significance, respectively.

VARIABLES (1) (2)

Alpha 0.4404***
(0.0738)
Alpha2 -0.0768
(0.0620)
Low Alpha 0.0102
(0.0093)
Mid Alpha 0.0084***
(0.0023)
High Alpha 0.0297**
(0.0147)
Low Alpha2 0.0027
(0.0109)
Mid Alpha2 -0.0021
(0.0022)
High Alpha2 -0.0060
(0.0097)
ln (Age) -0.0000 0.0000
(0.0008) (0.0008)
ln (FundSize) 0.0002 0.0002
(0.0004) (0.0004)
Expense 0.0166 0.0176
(0.0793) (0.0783)
Stdret -0.0350 -0.0379
(0.0257) (0.0275)
Obj Flow 0.4414*** 0.4471***
(0.1240) (0.1256)
Constant -0.0016 -0.0085
(0.0058) (0.0060)

Observations 6,385 6,385

R-squared 0.357 0.357
Past Flows Yes Yes
Manager FE No No
Year-Month FE Yes Yes

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Panel B. Conditional Double Sorts: Using Placebo Sample 2 (Conditioning on Same Family)

We present the conditional double sort results presented in Table VIII using a placebo sample where we
replace one of the manager’s funds (F2) with another fund that is in the same fund family and with similar
characteristics. We use Newey-West standard errors with 3 lags; t-statistics are presented in parenthesis. *, **,
and *** denote 10%, 5%, and 1% significance, respectively.

Holding
Period 1-month 3-month 6-month 12-month
Quintiles Alpha t-stat Alpha t-stat Alpha t-stat Alpha t-stat
1 (Lowest) -0.0001 (-0.06) -0.0004 (-0.28) -0.0012 (-0.93) -0.0001 (-0.09)
2 -0.0018 (-1.40) 0.0004 (0.40) -0.0001 (-0.09) 0.0001 (-0.05)
3 -0.0002 (-0.09) -0.0008 (-0.57) 0.0003 (0.25) 0.0006 (0.61)
4 -0.0002 (-0.11) -0.0001 (-0.08) 0.0001 (-0.01) 0.0001 (0.12)
5 (Highest) 0.0020 (1.04) 0.0016 (1.19) 0.0014 (1.08) 0.0020 (1.58)
5-1 0.0021 (0.78) 0.0020 (1.30) 0.0025 (1.32) 0.0022 (1.49)

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