Mutual Fund Alpha: Is It Managerial or Emotional?

This paper presents an examination on the impact of investor sentiment on mutual fund alpha. Using the Baker and Wurgler index, I find that investor sentiment plays an important role in explaining fund alpha, and the outperforming probability of funds rises as investor sentiment rises. Also, benchmark models adjusted by investor sentiment level can better explain the occurrence of fund alpha. This finding is confirmed by the cumulative distribution function (CDF) of the t values of the alpha estimates. Thus, the complete story of mutual fund alpha would be incomplete without incorporating investor sentiment.