When the Start Matters: Investor Sentiment and Hedge Fund Inceptions

70 Pages Posted: 24 Aug 2018 Last revised: 18 Mar 2020

See all articles by Lin Sun

Lin Sun

George Mason University - Department of Finance

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Date Written: March 17, 2019

Abstract

We examine whether investor sentiment affects hedge fund companies’ decision to start new funds. We find significantly more fund inceptions in hot markets than in cold markets. Moreover, funds opened in hot markets exhibit poor subsequent performance, shorter survival, and higher operational risk. Further evidence indicates that more rookie managers open funds in hot market, and they “contribute” more to the subsequent underperformance relative to seasoned managers. Investor clientele appears to vary with market conditions, and we find a dumb-money effect for hot-market incepted funds. Overall, inceptions due to high investor sentiment are not in the best interest of investors.

Keywords: Hedge fund, investor sentiment, inception, performance, money flow, delegated portfolio management

JEL Classification: G10, G11, G20, G41, G51

Suggested Citation

Sun, Lin and Sun, Zheng and Zheng, Lu, When the Start Matters: Investor Sentiment and Hedge Fund Inceptions (March 17, 2019). Available at SSRN: https://ssrn.com/abstract=3231259 or http://dx.doi.org/10.2139/ssrn.3231259

Lin Sun (Contact Author)

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

Zheng Sun

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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