Do Funds with More CAPM Investors Perform Better? And, If so, Why?

Measuring fund clientele by investors’ revealed usage of different asset pricing models, we show that funds with more CAPM investors perform better, all else equal. This predictability is not because the CAPM-alpha predicts future fund performance but because it reflects investor sophistication. This is consistent with Gârleanu and Pedersen’s (2018) key theoretical prediction that funds with more sophisticated investors should perform better due to the screening and matching/catering effects. We provide further empirical evidence that the CAPM effect predictably varies with traditional fund investor sophistication measures and is stronger in pools of funds with better resources