How does the smart money feel? Hedge fund sentiment, returns, and the business cycle

Hamid Yahyaei, Abhay Singh and Tom Smith

Journal of Behavioral and Experimental Finance, 2025, vol. 47, issue C

Abstract: We examine the relationship between the business cycle, sentiment, and the returns of listed U.S. hedge funds. Using Natural Language Processing (NLP) techniques, we construct a novel measure of hedge fund sentiment by mapping fund-level sentiment scores to hand-collected portfolio manager commentaries. Our empirical analysis shows that business cycle fluctuations exert the strongest influence on hedge fund sentiment, outweighing the effects of geopolitical, trade, and climate policy risks. Moreover, hedge fund sentiment exhibits explanatory power for the cross-section of returns, where a one-unit improvement in sentiment (from neutral to positive) is associated with an average annual return increase of approximately 0.74 percentage points.

Keywords: Business cycle; Hedge funds; Natural language processing; Sentiment (search for similar items in EconPapers)
JEL-codes: F44 G12 G23 G41 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S2214635025000632

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:47:y:2025:i:c:s2214635025000632

DOI: 10.1016/j.jbef.2025.101082

Access Statistics for this article

Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

More articles in Journal of Behavioral and Experimental Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().