Berk and Van Binsbergen (2015) showed that mutual fund investors use the CAPM to evaluate investments using flow data. This is corroborated by Barber, Huang and Odean (2016). But how universal is this? Berk and Van Binsbergen claim that this result should extend to all investors because any investor could invest in mutual funds. However, it seems unlikely that sophisticated investors, such as hedge fund investors, would just use the CAPM to evaluate their investments.

We find that they do. Hedge fund investors use the CAPM just like mutual fund investors. This result confirms the suspicion of Berk and Van Binsbergen, and deepens the so-called “CAPM puzzle”: how can investors use the CAPM but the CAPM not explain the cross section of returns?

• Thanks to helpful comments from Miguel Palacios and Shaun Davies.
• Forthcoming in European Financial Management.