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Investor Sentiment and the Pricing of Macro Risks for Hedge Funds

Author

Listed:
  • Zhuo Chen

    (PBC School of Finance, Tsinghua University, Beijing 100083, China)

  • Andrea Lu

    (Faculty of Business and Economics, University of Melbourne, Carlton, Victoria 3010, Australia)

  • Xiaoquan Zhu

    (China School of Banking and Finance, University of International Business and Economics, Beijing 100029, China)

Abstract

Hedge funds with larger macroeconomic-risk betas do not earn higher returns, in contrast to the theoretically predicted risk-return trade-off. Meanwhile, high macro-beta funds deliver higher returns than low macro-beta funds following a low-sentiment period, whereas the risk-return relation is flat following a high-sentiment period. We show that the sophisticated management of hedge funds explains this pattern. The relation between funds’ macro-risk betas and the timing abilities/investor flows is sentiment dependent, and such variation likely drives the contrasting beta-return trade-offs after high- and low-sentiment periods. A similar pattern is also observed in mutual funds.

Suggested Citation

  • Zhuo Chen & Andrea Lu & Xiaoquan Zhu, 2025. "Investor Sentiment and the Pricing of Macro Risks for Hedge Funds," Management Science, INFORMS, vol. 71(2), pages 1623-1645, February.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:2:p:1623-1645
    DOI: 10.1287/mnsc.2022.02792
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