Hyperbolic Mutual Funds
52 Pages Posted: 10 Feb 2019
Date Written: January 2019
This paper shows that hyperbolic language in mutual funds’ shareholder letters contains hidden yet important information for differentiating luck and skill. Hyperbolic shareholder letters predict improving alphas for funds with inferior past performance, suggesting that the transient past performance is driven by bad luck instead of lack of skill. Further analyses reveal that the information in hyperbole is primarily about funds’ market-timing ability, and is distinct from information in the tone or readability of the letters. Fund investors, however, do not fully understand the implications of hyperbole: unlucky funds with hyperbolic letters suffer from more outflows than other bottom performers.
Keywords: Mutual Fund Performance, Hyperbole, Skill, Luck, Textual Analysis
JEL Classification: G23, G41
Suggested Citation: Suggested Citation