Which Alpha? Which Fund Flow?

One of the ongoing debates in asset pricing is whether investors are rational to use the CAPM alpha to direct their fund flow. We seek to settle the debate in two steps. First, we attribute, by using the Shapley value approach, fund-level net flow to different determinants (which alpha drives fund flow?). Second, we assess how future fund performance is related to the different types of fund flow from the first step (which fund flow predicts future performance?). We show that the CAPM-alpha flow is the most consistent predictor of short term performance. However, we also show investors do not only use the CAPM-alpha as a skill measure and chase performance but that they dynamically switch between momentum and contrarian strategies when using CAPMalpha as a signal. Overall, our evidence suggests that CAPM has been a useful model for fund investors but this success needs to be attributed to the smartness of the fund investors in their use of CAPM.