Pessimistic Fund Managers

35 Pages Posted: 2 Feb 2017 Last revised: 17 Apr 2018

Yongqiang Chu

UNC Charlotte

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business

Date Written: March 1, 2018


This paper examines the predictive power of investment managers’ sentiment revealed in their letters to shareholders for their future performance, using closed-end funds (CEFs) as a laboratory. We find that pessimistic tone in managers’ letters to shareholders predicts superior future risk-adjusted. An increase in the pessimistic tone by one standard deviation leads to an increase of risk-adjusted NAV return by 2.7% ~ 4.0% per annum. The result is not driven by the 2008-2009 financial crisis and the subsequent recovery. We find that CEFs with pessimistic tone are more likely to initiate profitable stock trades prior to stocks’ earnings announcements. Our result is consistent with the reference-dependent effort provision theory that agents exert more effort when they feel at a loss relative to their reference points.

Keywords: Textual analysis, Fund disclosure, Fund performance, Reference-dependent effort provision

JEL Classification: M40, G14, G19

Suggested Citation

Chu, Yongqiang and Kim, Hugh Hoikwang, Pessimistic Fund Managers (March 1, 2018). Available at SSRN: or

Yongqiang Chu

UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Hugh Hoikwang Kim (Contact Author)

University of South Carolina, Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

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