Lexical diversity, soft information skills and hedge fund performance: Evidence from China

Abstract

This paper investigates the impact of hedge fund managers' lexical diversity on fund performance in China. Using a novel dataset of public statements from Chinese hedge fund managers, we measure lexical diversity to assess how language skills reflect cognitive abilities and influence fund outcomes. The analysis demonstrates that higher lexical diversity is positively associated with fund returns and alpha, but also with increased risk. We further show that the risk exposures involve greater sensitivity to specific factors like momentum, commodity markets, interest rates, and credit spreads, coupled with more active and distinctive trading behaviors, such as higher turnover and a focus on non-benchmark stocks. Additionally, investors appear to recognize these implications, as funds managed by lexically diverse individuals attract significantly greater inflows. The study provides new insights into the role of language and cognitive skills in financial markets, highlighting the importance of soft information in shaping hedge fund performance.