Sentiment hedging: How hedge funds adjust their exposure to market sentiment

Yao Zheng, Eric Osmer and Ruiyi Zhang

Journal of Banking & Finance, 2018, vol. 88, issue C, 147-160

Abstract: We investigate a new facet of hedging ability among hedge fund managers. Using a sentiment exposure model, we find evidence that fund managers adjust the market exposure of their portfolios to changes in market sentiment. Out-of-sample evidence indicates that hedge funds having the highest negative sentiment exposure outperform funds having the highest positive sentiment exposure by 1.7%–2.4% per year. The results remain persistent for both the sub-period analysis and the analysis excluding crisis periods. We also find that a hedge fund's willingness to take on sentiment exposure decreases with fund age and fund size and increases with incentive fees. Our findings remain robust even after controlling for hedge fund data biases, as well as using alternative sentiment measures.

Keywords: Hedge funds; Market sentiment; Fund age; Fund size; Incentive fees (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:88:y:2018:i:c:p:147-160

DOI: 10.1016/j.jbankfin.2017.11.016

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