Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance



This paper investigates how the tendency of mutual fund managers to follow aggregate institutional trades, which we term "imitative herding," relates to their future performance. Analyzing 2,255 actively managed US equity funds over the period 1990-2009, we find that imitative herding strongly and negatively predicts fund performance. The top decile portfolio of herding funds underperforms their anti-herding peers in the bottom decile by 192 basis points per year based on four-factor alphas. The underperformance of imitative funds is persistent, and more pronounced surrounding periods with greater investment opportunities for skilled managers to outperform. Moreover, it cannot be accounted for simply by the price impact of aggregate institutional trades. These results suggest that investors can use imitative herding to identify skilled and unskilled managers in the cross-section of mutual funds.
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Sebastian Gryglewicz
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