Macro Sentiment Risk and Hedge Fund Returns

Using a novel dataset of media sentiment concerning macroeconomic developments, we show that sentiment for economic growth, inflation, unemployment, and bond prices predict hedge fund returns. We blend these proxies with social disorder and political sentiment to create a broad macro sentiment index (MSI). Funds with high MSI betas generate 5.6% higher alphas than funds with low MSI betas. This result is robust to controlling other risk and uncertainty measures, and to orthogonalizing MSI against sentiment indices previously used in literature. We demonstrate the viability of MSI as a state variable and therefore a valid risk factor in the ICAPM