Investor Sentiment and the Pricing of Macro Risks for Hedge Funds

Zhuo Chen (), Andrea Lu () and Xiaoquan Zhu ()
Additional contact information
Zhuo Chen: PBC School of Finance, Tsinghua University, Beijing 100083, China
Andrea Lu: Faculty of Business and Economics, University of Melbourne, Carlton, Victoria 3010, Australia
Xiaoquan Zhu: China School of Banking and Finance, University of International Business and Economics, Beijing 100029, China

Management Science, 2025, vol. 71, issue 2, 1623-1645

Abstract: Hedge funds with larger macroeconomic-risk betas do not earn higher returns, in contrast to the theoretically predicted risk-return trade-off. Meanwhile, high macro-beta funds deliver higher returns than low macro-beta funds following a low-sentiment period, whereas the risk-return relation is flat following a high-sentiment period. We show that the sophisticated management of hedge funds explains this pattern. The relation between funds’ macro-risk betas and the timing abilities/investor flows is sentiment dependent, and such variation likely drives the contrasting beta-return trade-offs after high- and low-sentiment periods. A similar pattern is also observed in mutual funds.

Keywords: hedge funds; macroeconomic risks; sentiment (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.02792 (application/pdf)

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:inm:ormnsc:v:71:y:2025:i:2:p:1623-1645

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().