Does Stock Return Momentum Explain the "Smart Money" Effect?

Does the "smart money" effect documented by <link rid="b11">Gruber (1996)</link> and <link rid="b20">Zheng (1999)</link> reflect fund selection ability of mutual fund investors? We examine the finding that investors are able to predict mutual fund performance and invest accordingly. We show that the smart money effect is explained by the stock return momentum phenomenon documented by <link rid="b15">Jegadeesh and Titman (1993)</link>. Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners. Our finding that a common factor in stock returns explains the smart money effect offers no affirmation of investor fund selection ability. Copyright 2004 by The American Finance Association.