Text Sophistication and Sophisticated Investors
57 Pages Posted: 21 Aug 2019 Last revised: 3 Feb 2020
Date Written: August 17, 2019
We show that two novel measures of text sophistication, applied to strategy descriptions, encapsulate incremental information about hedge funds. Consistent with the linguistics literature, lexically diverse hedge funds, i.e, those that employ rich vocabulary, outperform, arbitrage prominent stock anomalies, eschew tail risk, and encounter fewer regulatory problems. Conversely, syntactically complex hedge funds, i.e., those that favor complicated sentence structures, trigger more regulatory infractions. Fund investors direct more flows to lexically diverse funds, but not enough to erode away their alphas. Our findings suggest that text sophistication measures provide texture on the cognitive ability and trustworthiness of sophisticated investors.
Keywords: hedge funds, textual analysis, text sophistication, lexical diversity, syntactic complexity, vocabulary
JEL Classification: G23
Suggested Citation: Suggested Citation