Consistent with the well-documented relation between political orientation and psychological traits, hedge funds’ political orientations are related to their portfolio decisions. Relative to politically conservative hedge funds, politically liberal hedge funds exhibit a preference for smaller stocks, less mature companies, volatile stocks, unprofitable companies, non-dividend paying companies, and lottery-type securities. Politically liberal hedge funds are also more likely to enter new positions or fully exit existing positions, and make larger adjustments to their U.S. equity market exposure. Our results suggest that psychological characteristics can influence the portfolio decisions of even those at the very top of the financial sophistication ladder.

We document the increasing role leveraged exchange traded funds (ETFs) play in institutional portfolios over time. A subset of independent investment advisors, quasi-indexers, and transient portfolio managers all make substantive use of these tools. Leveraged ETFs can be used for diversification or to implement strategic bets. Empirical tests suggest that institutional holders of leveraged ETFs predict weak portfolio performance in aggregate, consistent with manager hubris, especially among the set of institutional managers most likely to lack management skill. Interestingly, managers appear to reduce positions in leveraged ETFs following good past performance, potentially to lock in good returns, consistent with compensation-based incentives.

ABSTRACT Recent work suggests that sentiment traders shift from safer to more speculative stocks when sentiment increases. Exploiting these cross‐sectional patterns and changes in share ownership, we find that sentiment metrics capture institutional rather than individual investors’ demand shocks. We investigate the underlying economic mechanisms and find that common institutional investment styles (e.g., risk management, momentum trading) explain a significant portion of the relation between institutions and sentiment.