The Determinants of Investment Flows : Retail Versus Institutional Mutual Funds

This paper compares the fund selection criteria used by investors in retail mutual funds with the criteria of investors in institutional mutual funds. We find that, compared with investors of retail mutual funds, clients of institutional mutual funds use more quantitatively sophisticated criteria such as risk-adjusted return measures and tracking error, demonstrate stronger momentum-driven and herding behaviors, and are less sensitive to fund expense ratio. In addition, we provide evidence that the previously-documented convex form of the flow-performance relationship is driven mostly by retail funds. Finally, we find that flow patterns of both fund types vary across the business cycle