A U‐Shaped Flow–Performance Sensitivity Across the Globe

ABSTRACT

Using a worldwide sample of equity mutual funds, we document a new stylized fact: the flow‐performance sensitivity (FPS) is greater for both bottom and top performance, compared to the middle. This “U‐shaped” FPS is especially strong in down markets, for small/mid‐cap funds, and in the latest decade. These results hold over quarterly or yearly return horizons, while at the 3‐year horizon the conventional convex flow–performance relationship prevails. We rule out explanations based on proportional participation costs and cross‐sectional heterogeneity in FPS. Our findings are most consistent with a first‐mover advantage in redemptions (i.e. strategic complementarities) and increased fragility.