Do funds with more CAPM investors perform better?

Utilizing Shapley decomposition, we provide a clear ranking of fund flow determinants, including performance and non-performance attributes. This approach enables us to infer investor sophistication by examining which flow drivers are linked to future fund returns. Sophisticated investors primarily focus on CAPM-alpha but do not solely rely on it. Funds with higher R-squared values for CAPM-alpha consistently outperform in both short and long terms. This holds true irrespective of whether CAPM-alpha is employed in a momentum or contrarian strategy for directing fund flows. Our findings emphasize the need to consider investor heterogeneity and private information in benchmark usage studies. We find that, contrary to average behavior, CAPM-focused investors exhibit sophistication by integrating private signals to make performance predictions.