How Does the Speed of Capital Flows Affect Factor Momentum, Reversal and Volatility?

We document that hedge-fund and mutual-fund flows drive much of anomaly-return dynamics by, respectively, correcting and amplifying anomalies, and doing so slowly. Indeed, their contributions to the autocorrelation and volatility of anomaly returns add up to 57% over horizons longer than one year, vs. a few percent over shorter horizons. Thus, flows cause long-horizon factor momentum and stock excess volatility, not transient fluctuations. This effect is more pronounced for hedge funds, helmed by fund managers rather than fund investors, and linked to frictions. We address endogeneity concerns and propose a model highlighting the horizon-dependent effects of capital on anomaly-return dynamics.