Can mutual funds time investor sentiment?

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.