How does the smart money feel? Hedge fund sentiment, returns, and the business cycle

Hamid Yahyaei; Abhay Singh; Tom Smith

doi:10.1016/j.jbef.2025.101082

How does the smart money feel? Hedge fund sentiment, returns, and the business cycle

Hamid Yahyaei^*, Abhay Singh, Tom Smith

^*Corresponding author for this work

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

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Abstract

We examine the relationship between the business cycle, sentiment, and the returns of listed U.S. hedge funds. Using Natural Language Processing (NLP) techniques, we construct a novel measure of hedge fund sentiment by mapping fund-level sentiment scores to hand-collected portfolio manager commentaries. Our empirical analysis shows that business cycle fluctuations exert the strongest influence on hedge fund sentiment, outweighing the effects of geopolitical, trade, and climate policy risks. Moreover, hedge fund sentiment exhibits explanatory power for the cross-section of returns, where a one-unit improvement in sentiment (from neutral to positive) is associated with an average annual return increase of approximately 0.74 percentage points.

Original language	English
Article number	101082
Pages (from-to)	1-14
Number of pages	14
Journal	Journal of Behavioral and Experimental Finance
Volume	47
DOIs	https://doi.org/10.1016/j.jbef.2025.101082
Publication status	Published - Sept 2025

Bibliographical note

© 2025 The Authors. Published by Elsevier B.V. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

Business cycle
Hedge funds
Natural language processing
Sentiment

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10.1016/j.jbef.2025.101082Licence: CC BY

Publisher version (open access)Final published version, 1.64 MBLicence: CC BY

Cite this

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title = "How does the smart money feel? Hedge fund sentiment, returns, and the business cycle",

abstract = "We examine the relationship between the business cycle, sentiment, and the returns of listed U.S. hedge funds. Using Natural Language Processing (NLP) techniques, we construct a novel measure of hedge fund sentiment by mapping fund-level sentiment scores to hand-collected portfolio manager commentaries. Our empirical analysis shows that business cycle fluctuations exert the strongest influence on hedge fund sentiment, outweighing the effects of geopolitical, trade, and climate policy risks. Moreover, hedge fund sentiment exhibits explanatory power for the cross-section of returns, where a one-unit improvement in sentiment (from neutral to positive) is associated with an average annual return increase of approximately 0.74 percentage points.",

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N2 - We examine the relationship between the business cycle, sentiment, and the returns of listed U.S. hedge funds. Using Natural Language Processing (NLP) techniques, we construct a novel measure of hedge fund sentiment by mapping fund-level sentiment scores to hand-collected portfolio manager commentaries. Our empirical analysis shows that business cycle fluctuations exert the strongest influence on hedge fund sentiment, outweighing the effects of geopolitical, trade, and climate policy risks. Moreover, hedge fund sentiment exhibits explanatory power for the cross-section of returns, where a one-unit improvement in sentiment (from neutral to positive) is associated with an average annual return increase of approximately 0.74 percentage points.

AB - We examine the relationship between the business cycle, sentiment, and the returns of listed U.S. hedge funds. Using Natural Language Processing (NLP) techniques, we construct a novel measure of hedge fund sentiment by mapping fund-level sentiment scores to hand-collected portfolio manager commentaries. Our empirical analysis shows that business cycle fluctuations exert the strongest influence on hedge fund sentiment, outweighing the effects of geopolitical, trade, and climate policy risks. Moreover, hedge fund sentiment exhibits explanatory power for the cross-section of returns, where a one-unit improvement in sentiment (from neutral to positive) is associated with an average annual return increase of approximately 0.74 percentage points.

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KW - Sentiment

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ER -

How does the smart money feel? Hedge fund sentiment, returns, and the business cycle

Abstract

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Keywords

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