systematic risk varies across the cycle, increasing during periods of stress in financial markets. Better

educated and more experienced managers have greater skill in managing systematic and correlation

risks and this ability is more pronounced during down markets. Funds with higher and increasing

systematic and correlation risks realize significantly lower flows. Investors recognize skill in managing

systematic risk and reward funds with persistently low systematic risk with incremental flows. The

relation between flow and systematic risk is markedly asymmetric, with investors showing little

sensitivity to systematic risk decreases regardless of market conditions. We find evidence that these

preferences are rational based on market timing and performance analysis. Although investors pay high

fees to invest in low systematic risk funds, these higher costs are more than offset by the superior

performance of the funds. We also find that funds appear to preferentially time fee increases to

coincide with decreases in systematic risk.