Changes in Mutual Fund Flows and Managerial Incentives

Fund flows become less sensitive to high performance after 2000, thereby decreasing convexity of the flow-performance relationship. I present novel evidence on the effects of aggregate performance on convexity of the flow-performance relationship. Flows to high-performing funds decrease when the average performance is high and when the performance dispersion is low. A decrease in convexity of the relationship is associated with a decrease in managers' risk shifting. Low-performers undertake more risk toward the end of the year before 2000, but not after 2000. Further, low-performers' risk shifting lessens when the average performance is high and the performance dispersion is low