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Investor Sentiment and Mutual Fund Strategies

Published online by Cambridge University Press:  13 November 2015

Massimo Massa  and
Vijay Yadav
Massimo Massa
Affiliation:
massimo.massa@insead.edu, INSEAD, 77305 Fontainebleau Cedex, France
Vijay Yadav*
Affiliation:
yadav@essec.edu, ESSEC Business School, Singapore 188064, Singapore.
*
*Corresponding author: yadav@essec.edu
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Abstract

We show that mutual funds employ portfolio strategies based on market sentiment. We build a proxy for the degree of a fund’s sentiment beta (or FSB). The low-FSB funds outperform high-FSB funds, even after controlling for standard risk factors and fund characteristics. This effect is sizable and delivers a net-of-risk performance of 3.8% per year. Funds with a lower FSB follow more idiosyncratic strategies, suggesting that FSB is a deliberate, active choice of the fund manager. A sentiment contrarian strategy leads to high flows due to its superior performance, whereas a sentiment catering strategy fails to attract significant investor flows.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 4 , August 2015 , pp. 699 - 727
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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