When the Start Matters: Investor Sentiment and Hedge Fund Inceptions
70 Pages Posted: 24 Aug 2018 Last revised: 18 Mar 2020
Date Written: March 17, 2019
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: Suggested Citation