Sentiment Trading and Hedge Fund Returns

66 Pages Posted: 14 Jan 2016 Last revised: 20 Jul 2021

See all articles by Yong Chen

Yong Chen

Texas A&M University - Department of Finance

Bing Han

University of Toronto, Rotman School of Management

Jing Pan

Pennsylvania State University - Department of Accounting

Date Written: March 31, 2021

Abstract

In the presence of sentiment fluctuations, arbitrageurs may engage in different strategies leading to dispersed sentiment exposures. We find that hedge funds in the top decile ranked by sentiment beta outperform those in the bottom decile by 0.59% per month on a risk-adjusted basis, with the spread being larger among skilled funds. We also find that about 10% of hedge funds have sentiment timing skill that positively correlates with fund sentiment beta and contributes to fund performance. Our findings show that skilled hedge funds can earn high returns by predicting and exploiting sentiment changes rather than betting against mispricing.

Keywords: Hedge funds, investor sentiment, sentiment beta, sentiment timing

JEL Classification: G23, G11

Suggested Citation

Chen, Yong and Han, Bing and Pan, Jing, Sentiment Trading and Hedge Fund Returns (March 31, 2021). Journal of Finance, Vol. 76, No. 4, August 2021, pp. 2001–2033 , Available at SSRN: https://ssrn.com/abstract=2714580 or http://dx.doi.org/10.2139/ssrn.2714580

Yong Chen (Contact Author)

Texas A&M University - Department of Finance ( email )

360 Wehner Building
College Station, TX 77843-4218
United States

HOME PAGE: http://mays.tamu.edu/directory/yong-chen

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Jing Pan

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,344
Abstract Views
4,887
Rank
26,937
PlumX Metrics