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Fund performance is typically evaluated by implicitly supposing that the fund manager chooses trades and thus the fund portfolio based on his skills and information. In reality, however, funds face out- and in-flows which may influence their investment decisions. In that respect, Edelen (1999) was one of the first to analyze how investor flows influence portfolio trading by mutual funds. Fund flows may decrease the performance by increasing trading costs and inducing non-optimal sales and purchases.
Alexander et al. (2007) document that flow-induced portfolio purchases underperform benchmarks while flow-induced portfolio sales outperform their benchmarks. Thus heavy in-flows following outperformance can lead to future underperformance (Huang et al. (2007)). Fund flows also...
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