The Relationship between Hedge Fund Performance and Stock Market Sentiment

Yao Zheng and Eric Osmer
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Yao Zheng: Department of Finance, Northern Illinois University, DeKalb, IL, USA
Eric Osmer: Department of Finance, Northern Illinois University, DeKalb, IL, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2018, vol. 21, issue 03, 1-29

Abstract: We examine the dynamic effect of aggregate stock market sentiment on the performance of various hedge fund styles. We find that hedge funds typically perform better during periods of optimistic sentiment and that for different hedge fund styles there is a differential response of hedge fund returns to positive and negative sentiment shocks. We also find that changes in aggregate investor sentiment have a larger effect on hedge fund performance during periods of high conditional volatility. Our results suggest there is a strong asymmetry in the relationship between hedge fund performance and investor sentiment.

Keywords: Hedge funds; investor sentiment; VAR-GARCH-M; Markov regime-switching (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S0219091518500169

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