Fund Herding Leadership and Subsequent Mutual Fund Performance

Summary

This research review examines whether a US equity mutual fund’s performance relates to other funds following its trades. It extends a herding measure to classify funds by how strongly their purchases or sales are followed in later quarters, then compares risk-adjusted performance across groups and in cross-sectional regressions controlling for fund characteristics. The reported evidence links purchase leadership to stronger subsequent performance and sale leadership to weaker performance.

The review further separates trades motivated by valuation from those motivated by liquidity. Valuation-motivated purchases strengthen the positive association for purchase leaders, while results for valuation-motivated sales are weak and statistically indistinct from liquidity-driven sales. The authors interpret the pattern as consistent with trade-driven price effects carrying through from stocks to fund returns. The evidence is based on historical US fund and stock data, and the review cautions that results from this sample and prior literature do not establish a reliable trading rule or guarantee future performance.

Key ideas

• The study measures fund leadership by how much other funds follow its purchases or sales in subsequent periods.
• Purchase leadership is associated with stronger near-term risk-adjusted performance, while sale leadership is associated with weaker performance.
• The analysis reports that valuation-motivated buying strengthens the performance relationship for purchase leaders.
• The relationship between valuation-motivated sales and performance is weak, with short-selling constraints offered as a possible explanation.
• The findings come from historical US mutual fund data and may not generalize to other markets or periods.

Tags

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