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A Tale of Bad Days: Investor Preferences and Fund Manager Skill

Samia Badidi, Martijn Boons, and Rafael Zambrana
Working paper · First circulated 2024

Read paper on SSRN

In one sentence

Investors respond disproportionately to fund performance on bad market days, when outperformance reflects a distinct and persistent form of managerial skill.

Abstract

While modern financial markets provide investors with almost instant access to return data, whether they monitor fund performance at high frequency and the implications of this behavior remain unclear. We show that investor flows respond strongly and symmetrically to fund performance on days with low market returns (bad days) but barely respond on good days. Consistent with the smart money hypothesis, outperformance on bad days is persistent and contributes to long-term outperformance. We find no evidence that managers can consistently outperform on both bad and other days. Instead, outperformance on bad days relies on specialized trading strategies and broker connections.

Presentations
HEC Paris, Nova School of Business and Economics*, Tilburg University, University of Notre Dame*, Vienna Graduate School of Finance*, BI Norwegian Business School*, CFR Research Seminar*, and EUROFIDAI-ESSEC 2024 Paris December Finance Meeting.
* Presentation by coauthors.

Citation

Badidi, Samia, Martijn Boons, and Rafael Zambrana (2024). A Tale of Bad Days: Investor Preferences and Fund Manager Skill. Working paper. See SSRN for the latest revision.