Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance
90 Pages Posted: 12 Apr 2013 Last revised: 12 Dec 2017
Date Written: December 1, 2017
We uncover a negative relation between herding behavior and skill in the mutual fund industry. Our new, dynamic measure of fund-level herding captures the tendency of fund managers to follow the trades of the institutional crowd. We find that herding funds underperform their antiherding peers by over 2% per year. Differences in skill drive this performance gap: antiherding funds make superior investment decisions even on stocks not heavily traded by institutions, and can anticipate the trades of the crowd; furthermore, the herding-antiherding performance gap is persistent, wider when skill is more valuable, and larger among managers with stronger career concerns.
Keywords: Mutual funds, performance, herding, imitation, alpha
JEL Classification: G11, G20, G23
Suggested Citation: Suggested Citation