Does herding behavior reveal skill? An analysis of mutual fund performance

Jiang, Hao and Verardo, Michela (2013) Does herding behavior reveal skill? An analysis of mutual fund performance. Financial Markets Group Discussion Papers (720). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

This paper finds that fund herding, defined as the tendency of a mutual fund to follow past aggregate institutional trades, is an important predictor of mutual fund performance. Examining actively managed U.S. equity mutual funds over the period 1990-2009, we find that funds with a higher herding tendency achieve lower future returns. The performance gap between herding and antiherding funds is persistent over various horizons and is more pronounced in periods of greater investment opportunities in the active management industry. We show that fund herding is negatively correlated with recently developed measures of mutual fund skill and provides distinct information for the predictability of mutual fund performance. Overall, our results suggest that fund herding reveals information about the cross-sectional distribution of skill in the mutual fund industry.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2013 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G2 - Financial Institutions and Services > G20 - General G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Date Deposited:	26 Jun 2023 14:09
Last Modified:	16 Sep 2023 00:01
URI:	http://eprints.lse.ac.uk/id/eprint/119034

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