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Extreme fund performance and investor divergence in beliefs about manager skill

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  • Zhan, Yaosong
  • Zhang, Wenwen
  • Liu, Zhenya

Abstract

Extreme fund performance creates divergent investor opinions about manager skill. We develop a model predicting that this disagreement follows a U-shaped pattern, increasing with both exceptionally good and poor performance. Using a flow-based divergence index and Chinese mutual fund data, we empirically confirm this relationship. We argue that this pattern is driven by retail investors, whose tendency to focus on extreme outcomes amplifies their disagreement. Higher divergence predicts weaker future performance persistence but also helps investors improve their realized returns by allowing them to exit funds before subsequent downturns.

Suggested Citation

  • Zhan, Yaosong & Zhang, Wenwen & Liu, Zhenya, 2026. "Extreme fund performance and investor divergence in beliefs about manager skill," Journal of Financial Markets, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:finmar:v:77:y:2026:i:c:s1386418125000497
    DOI: 10.1016/j.finmar.2025.101009
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    References listed on IDEAS

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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