Investor Sentiment and Time-Varying Market Risk in Market-Neutral Hedge Funds

This paper examines whether market risk in market-neutral hedge funds is associated with investor sentiment. It is expected that market risk of these hedge funds depends on investor sentiment caused by return-chasing behavior of investors. The results provide support for this expectation, and thus the risk in the market neutral hedge fund strategy caters to investors' preferences. The exposure of market-neutral hedge funds to commonly used empirical risk factors is also altered by investor sentiment.