Industry Herding by Hedge Funds

Abstract

This paper investigates hedge fund herding at the industry level and its impact on industry returns. Although the level of industry herding on average is substantially weaker for hedge funds compared to non-hedge fund institutions, we find that industries that experience heavy herding by hedge funds experience return reversals in the long-run. We provide evidence that non-hedge funds especially follow hedge funds' sell herding industries in following quarters, and the long-run return reversals observed in these industries are due to non-hedge funds' failure to timely react to good news coming from these heavy hedge fund sell-herding industries in subsequent quarters.

Keywords: herding, hedge funds, industry returns

JEL Classification: G10, G11, C13