Fund managers tell you when they will outperform

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Last year, I wrote a post showing that hedge fund managers have an inkling when they are going to underperform, and it can be measured with their SEC Form PF filings. Unfortunately, that information is not public, but I am glad to see that thanks to textual analysis tools, we can quantify the tone of fund managers’ investment letters. And that gives investors important clues about future performance as well.A team around Anastasija Tetereva from Erasmus University in Rotterdam used the fund manager letters available in the SEC’s EDGAR database to analyse the tone fund managers strike in their letters to investors.Specifically, they measured the following dimensions:Negativity: The ratio of negative words used by the fund manager.Confidence: The ratio of strong modal words conveying certainty and high confidence versus weak modal words conveying uncertainty.Personalness: The share of words referring to the fund manager and/or her team.Complexity: The share of complex words used and the length of the sentences.Similarity: How much overlap is there between the shareholder letter and the previous shareholder letter.The chart below shows the correlation between an increase in each of these variables and the fund’s return in the subsequent six months. I have shown all regression coefficients, even though only the confidence variable is statistically significant, to give you an idea of the directionality.Correlation between fund manager language and future fund returns (2006-2016)Source: Tetereva et al. (2026). ** indicates statistical significance at the 5% level.As you can see, …