Where are the Smart Investors? New Evidence of the Smart Money Effect

Prior research debates focus on whether investors are smart enough to invest in funds that subsequently outperform. This paper documents a robust smart money effect among small fund investors who invest in the top performing funds, even after controlling for the momentum factor argued by Sapp and Tiwari (2004). I further explore the reason for the smart money effect and find that such outperformance comes from the market timing ability of smart investors. Market timing ability distinguishes smart investors from investors who naively chase the winners.