Fund sentiment beta and delegated investment

ABSTRACT

This study investigates the impact of fund sentiment beta (FSB) in delegated investment, which provides managed funds a novel grasp for formulating investment strategies. In a unified framework, it is shown that fund managers can exploit investors’ sentiment with strategic choice of FSB: when investors are optimistic (pessimistic), the catering (contrarian) strategy delights investors, who are thus willing to invest more and pay more to fund managers. Funds with high sentiment sensitivity tend to have elevated volatility, which warns against its excessive usage. These results provide theoretical support to many empirical findings in literature.

KEYWORDS:

• Fund sentiment beta (FSB)
• delegated investment
• incentive contract
• fund risk

JEL CLASSIFICATION:

• G41
• G23
• G11

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China [grant numbers 71571038, 71971048, and 71561011], the Fundamental Research Funds for Central Universities in China [grant number N2006010], Liaoning Revitalization Talents Program in China [grant number XLYC1907015], and Shenyang Science & Technology Innovation Support Plan [grant number RC190458].