Deep Learning Fund Managers' Narratives : Risk Assessment and Fund Performance

We use a deep learning model to extract syntax and context information from mutual fund managers' narrative discussions and measure their risk assessment. We validate the forward-looking nature of the risk measure by showing that more negative (positive) risk assessment in managers' narratives leads to a reduction (increase) of portfolio risk in the subsequent period. The forward-looking risk assessment measure also reflects managerial skills: managers who are conscious of negative risk generate superior risk-adjusted returns and higher Sharpe ratios and are more likely to have higher intra-quarter trading skills and higher Morningstar ratings. Interestingly, not all market participants respond to this narrative-based measure except sophisticated investors. The forward-looking nature of our new measure can thus inform investors and researchers about fund managers' risk management and performance