Text Sophistication and Sophisticated Investors

47 Pages Posted: 21 Aug 2019 Last revised: 29 Aug 2019

See all articles by Juha Joenväärä

Juha Joenväärä

Aalto University School of Business; University of Maryland - Robert H. Smith 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

We show that two novel measures of text sophistication, applied to hedge fund strategy descriptions, encapsulate incremental information about funds. Consistent with the linguistics literature, hedge funds with lexically diverse strategy descriptions outperform, eschew tail risk, and encounter fewer regulatory problems. In line with the literature, hedge funds with syntactically complex strategy descriptions report more regulatory violations and trigger more severe infractions. Fund investors recognize the dichotomy and direct flows accordingly, but not enough to erode away the alphas of lexically diverse funds. Our findings suggest that text sophistication measures provide texture on the cognitive ability and trustworthiness of sophisticated investors.

Suggested Citation

Joenvaara, Juha and Karppinen, Jari and Teo, Melvyn and Tiu, Cristian Ioan, Text Sophistication and Sophisticated Investors (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

University of Maryland - Robert H. Smith School of Business ( email )

MD
United States

Jari Karppinen

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014
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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