Rearders of our blog will recall evidence we've presented regarding the nature of "hedge fund herding". We have made the case that hedge fund crowding is not nearly as prevelant as the media and the blogosphere perceives.
Now a new academic paper entitled "Hedge Fund Herding: The Apologists’ Evidence" by Blerina Reca, Richard Sias, and H. J. Turtle arrives at the same conclusion. From the paper's abstract:
"The popular press and conventional wisdom holds that hedge funds trade excessively, engage in herding, and, as a result, destabilize markets. We examine hedge fund herding using a proprietary dataset that identifies hedge funds filing 13(f) reports. Hedge funds’ role in the market dramatically increases over time and hedge funds exhibit much higher turnover than other institutional investors. Inconsistent with common perceptions, however, hedge funds are less likely to herd or engage in momentum trading (a form of herding) than other non-hedge fund institutions. Moreover, inconsistent with the thesis that hedge funds following similar strategies produce “crowded” trades, hedge funds’ portfolios have much less overlap than non-hedge fund institutions’ portfolios. Last, although we find evidence that non-hedge fund institutions crowding into and out of the same stocks destabilizes prices, hedge funds trading together appears to drive price towards fundamental values."
See our 5 Myths About Cloning Hedge Funds presentation for more on common hedge fund misconceptions.
