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Journal of Financial and Quantitative Analysis

Journal of Financial and QuantitativeAnalysis

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Investor Sentiment and Mutual Fund Strategies

Published online by Cambridge University Press:

We show that mutual funds employ portfolio strategies based on market sentiment. We build a proxy for the degree of a funds 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.

COPYRIGHT: © Michael G. Foster School of Business, University of Washington 2015

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