Fund Buying Leadership, Herding, and Mutual Fund Performance

Summary

This research summary examines whether one mutual fund’s trades lead other funds into or out of the same stocks, and how that pattern relates to performance. It classifies funds by how strongly their quarterly purchases or sales are followed in the next period, then compares subsequent risk-adjusted returns. The analysis also separates trades attributed to valuation from those attributed to liquidity and uses cross-sectional regressions controlling for fund characteristics.

Using U.S. actively managed equity fund data from 1980 through 2010, the cited study finds that fund demand displays herding beyond patterns explained by correlated fund flows. Funds whose buys are followed tend to have stronger near-term performance, while funds whose sells are followed tend to perform worse. The buying result is stronger when purchases appear valuation-driven; evidence for valuation-driven selling is weak, which the summary connects to short-sale constraints. These are historical associations from one market and sample, not proof that copying leading funds will generate returns; trading motives and price effects may not generalize.

Key ideas

• The study measures fund leadership by the extent to which other funds follow a fund’s purchases or sales.
• Fund demand herding remains after accounting for correlated fund flows.
• Buy-leading funds show stronger near-term performance, while sell-leading funds show weaker performance.
• Valuation-motivated buying strengthens the reported performance relationship, but selling evidence is less clear.
• The findings are historical and may reflect market-specific constraints rather than a transferable trading rule.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.