Smart money meets smart size

Qiang Bu, Nelson Lacey

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


We examine the smart money effect from two dimensions - fund size and cash flow based on the US open-end equity funds. We find that positive cash flow portfolios earn significant four-factor alphas, and that there exists a quadratic relationship between positive cash flow fund size and abnormal returns. This is a departure from the pure small fund effect documented in the literature. Putting size and cash flows together, we are able to show that conditional on size, funds with higher cash inflows outperform funds with lower cash inflows, and that conditional on cash flows, smaller funds generally outperform larger funds. We conclude that following the money flows into mutual funds can bring higher risk-adjusted returns, especially when the money flows meet the optimal fund size.

Original languageEnglish (US)
Pages (from-to)392-405
Number of pages14
JournalJournal of Asset Management
Issue number6
StatePublished - Feb 2010

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Strategy and Management
  • Information Systems and Management


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