Why Do The Investor Inflows And Outflows Matter?

This is part 2 of a multi-part post on Eric Boughton, the Chief Analyst at Matisse Capital. In this post, Eric explains why inflows and outflows matter and what factors they influence.

• See Part 1 here: Eric Boughton: What Is A CEF And How Does It Work?
• See Part 3 here: Eric Boughton: How Large Is Matisse Capital’s Position In Pershing Square?

Q1 hedge fund letters, conference, scoops etc

Josh: Okay. Why do the investor inflows and outflows matter? Beyond the movements in discount itself, what are the other factors that they influence?

Eric: It turns out when you study inflows and outflows for closed end funds and for open-end funds, that can be a pretty smart thing to do, it turns out, not maybe for the way you’d imagine. It turns out that investors, as a group, are systematically wrong with their investment decisions in mutual funds. In fact, according to several studies, the average mutual fund performs at least two to three percentage points better per year than the average investor in those very same mutual funds. What that means is that investors as a group are generally ploughing money into a fund close to a performance peak and they’re yanking money out of a fund much closer to a performance trough.