Finance Seminar（2014-20）

Topic:Noise Trader Risk and Hedge Fund Returns

Speaker:Bing Han, University of Toronto

Time:Tuesday, 1 July, 10:00-11:30

Location:Room 217,Guanghua Building 2

Abstract:This paper documents a new and important cross-sectional determinant of hedge fund expected returns, their exposures to noise trader risk, measured as beta of fund returns with respect to unexpected change in investor sentiment. Using the Baker and Wurgler (2007) index as the sentiment proxy, and for a comprehensive sample of equity-oriented hedge funds over the period 1994-2010, we find strong evidence that, on average, hedge funds with higher sentiment beta subsequently outperform those with lower sentiment beta by about 0.6% per month. The difference in the average returns increases to about 0.82% after controlling for risk factors identified in existing studies. Our findings suggest that noise trader risk is priced in hedge funds.