Can mutual funds time investor sentiment?

Author ORCID Identifier

Yao Zheng:https://orcid.org/0000-0003-2527-0835

Publication Title

Review of Quantitative Finance and Accounting

ISSN

0924865X

E-ISSN

44044

Document Type

Article

Abstract

This paper examines the ability of mutual fund managers to time aggregate investor sentiment. Our results indicate that mutual fund managers alter their fund’s market exposure relative to changes in investor sentiment. The out-of-sample analysis suggests top sentiment timers, which hedge against abnormally high market sentiment, generate higher returns than bottom sentiment timers by approximately 3% per year. These results persist even to the exclusion of crisis periods. Moreover, our results suggest that sentiment timing ability, especially the ability to hedge against sentiment, is more likely to be associated with funds that are older and larger, while the tendency to chase sentiment is highly driven by the level of fees received by the mutual fund manager. Our results are robust after controlling for alternative sentiment measures, various timing abilities and several risks.

First Page

1449

Last Page

1486

Publication Date

5-1-2020

DOI

10.1007/s11156-019-00831-6

Keywords

Aggregate market sentiment, Fund characteristics, Mutual funds, Timing ability

Department

Department of Finance

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