Hedge Fund Flows and Performance Streaks: How Investors Weigh Information

Cash flows to hedge funds are highly sensitive performance streaks, a streak being defined as subsequent quarters during which fund performs above or below benchmark, even after controlling for wide range of common measures. At the same time, streaks have limited predictive power regarding future performance. This suggests investors weigh information suboptimally, and their decisions driven too strongly by belief in continuation good performance, consistent with “hot hand fallacy.” The that choose invest do not perform significantly better than those they divest from. These findings overreaction certain types support notion sophisticated superior processing abilities. paper was accepted David Simchi-Levi, finance.