The Vocabulary of Hedge Funds

57 Pages Posted: 21 Aug 2019 Last revised: 28 Jun 2021

See all articles by Juha Joenväärä

Juha Joenväärä

Aalto University School of Business

Jari Karppinen

University of Oulu

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Cristian Ioan Tiu

University at Buffalo; TIAA Institute

Date Written: August 17, 2019

Abstract

Evidence from linguistics relates lexical diversity, i.e., the propensity of the writer to employ rich vocabulary, to cognitive ability. We find that lexically diverse hedge funds outperform lexically homogeneous hedge funds after adjusting for risk. Lexically diverse funds outperform by exploiting textual changes in corporate disclosures and harnessing qualitative information about firm manager's decisions. Data on sibling fund lexical diversity together with an instrumental variable approach and regressions address endogeneity concerns. Investors react correctly but not fully to the information on fund manager skill embedded in lexical diversity. Our results support the notion that linguistic skills are helpful for investment performance.

Keywords: hedge funds, textual analysis, lexical diversity, vocabulary, linguistic skills, corporate disclosures, cognitive ability, lexical richness

JEL Classification: G23

Suggested Citation

Joenvaara, Juha and Karppinen, Jari and Teo, Melvyn and Tiu, Cristian Ioan, The Vocabulary of Hedge Funds (August 17, 2019). Available at SSRN: https://ssrn.com/abstract=3438758 or http://dx.doi.org/10.2139/ssrn.3438758

Juha Joenvaara (Contact Author)

Aalto University School of Business ( email )

Finland

Jari Karppinen

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014, 90570
Finland

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

Cristian Ioan Tiu

University at Buffalo ( email )

238 Jacobs Management Center
Jacobs Hall, North Campus
Buffalo, NY NY 14260
United States
7166453299 (Phone)

TIAA Institute ( email )

8500 Andrew Carnegie Blvd
E3/S8
Charlotte, NC 28262
United States

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