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Which Money Is Smart? Mutual Fund Buys and Sells of Individual and Institutional Investors




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    • Keswani is at Cass Business School. Stolin is at Toulouse Business School. Special thanks are due to Robert Stambaugh (former editor) and an anonymous referee for very helpful comments and suggestions. We are also grateful to Vikas Agarwal, Yacine Aït-Sahalia, Vladimir Atanasov, Rolf Banz, Harjoat Bhamra, Chris Brooks, Keith Cuthbertson, Roger Edelen, Mara Faccio, Miguel Ferreira, Gordon Gemmill, Matti Keloharju, Brian Kluger, Ian Marsh, Kjell Nyborg, Ludovic Phalippou, Vesa Puttonen, Christel Rendu de Lint, Leonardo Ribeiro, Dylan Thomas, Raman Uppal, Giovanni Urga, Scott Weisbenner, Steven Young, and Lu Zheng, and to participants at Helsinki School of Economics/Swedish School of Economics, Pictet & Cie, Cass Business School, Toulouse Business School, and University of Amsterdam seminars, as well as the 2006 Western Finance Association conference in Keystone, Colorado, the International Conference on Delegated Portfolio Management and Investor Behavior in Chengdu, China, the Portuguese Finance Network 2006 conference, and The Challenges Ahead for the Fund Management Industry conference at Cass Business School for helpful comments. We thank Dimensional Fund Advisors, the Allenbridge Group, the Investment Management Association, Stefan Nagel, and Jan Steinberg for help with data, and Heng Lei for research assistance. All errors and omissions are ours. This paper is dedicated to the memory of Gordon Midgley (1947–2007), research director of the IMA.


Gruber (1996) and Zheng (1999) report that investors channel money toward mutual funds that subsequently perform well. Sapp and Tiwari (2004) find that this “smart money” effect no longer holds after controlling for stock return momentum. While prior work uses quarterly U.S. data, we employ a British data set of monthly fund inflows and outflows differentiated between individual and institutional investors. We document a robust smart money effect in the United Kingdom. The effect is caused by buying (but not selling) decisions of both individuals and institutions. Using monthly data available post-1991 we show that money is comparably smart in the United States.

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