Thought crowds were wise? This paper1 documents a negative relation between herding behavior and skill in the mutual fund industry. The authors measure herding at the fund level by measuring the tendency of fund managers to follow the past trades of the institutional crowd. They find that herding funds underperform their anti-herding peers by over 2% per year.
This performance gap is attributed to differences in skill, because anti-herding funds are found to make superior investment decisions even on stocks not heavily traded by institutions, and to be able to anticipate the trades of the crowd. We believe this article provides useful insights for manager selection decisions.
1Jiang & Verardo, “Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance”, Journal of Finance, Vol. 73, No. 5, pp. 2229-2269, 2018.
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