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Articles (2015), Journal of Financial and Quantitative Analysis, 50 (4), pp. 699-727

Investor Sentiment and Mutual Fund Strategies

MASSIMO M., YADAV Vijay

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 lower FSB follow more idiosyncratic strategies, suggesting that FSB is 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.

MASSIMO, M. and YADAV, V. (2015). Investor Sentiment and Mutual Fund Strategies. Journal of Financial and Quantitative Analysis, 50(4), pp. 699-727.