Investor Sentiment and the Pricing of Macro Risks for Hedge Funds

52 Pages Posted: 24 Feb 2019 Last revised: 8 Mar 2021

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University - PBC School of Finance

Andrea Lu

The University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Xiaoquan Zhu

Tsinghua University, PBC School of Finance, Students

Date Written: March 7, 2021

Abstract

Hedge funds with larger macroeconomic-risk betas do not earn higher returns, in contrast to the theoretically predicted risk-return trade-off. Meanwhile, high macro-beta funds deliver higher returns than low macro-beta funds following low-sentiment months, whereas the risk-return relation is flat following high-sentiment months. Our findings are consistent with the conjecture that standard asset pricing theory is still at work when market participants are rational. On the other hand, sophisticatedly managed portfolios including hedge funds are likely to be affected by sentiment-induced mispricing, especially for those with high macro-risk loadings. Fund flows and fund managers' sentiment timing are possible driving forces underlying the observed pattern.

Keywords: Hedge Funds, Macroeconomic Risks, Sentiment

JEL Classification: G10, G11, G23

Suggested Citation

Chen, Zhuo and Lu, Andrea Y. and Zhu, Xiaoquan, Investor Sentiment and the Pricing of Macro Risks for Hedge Funds (March 7, 2021). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3330968 or http://dx.doi.org/10.2139/ssrn.3330968

Zhuo Chen (Contact Author)

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing, Beijing 100083
China

Andrea Y. Lu

The University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
Parkville, Victoria 3010 3010
Australia
+61383443326 (Phone)
+61383446914 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Xiaoquan Zhu

Tsinghua University, PBC School of Finance, Students ( email )

No. 43, Chengdu Road
Beijing 100083
China

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