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Alternative Market Briefing

Study reveals hedge funds are not such bad guys on the herding front

Tuesday, July 03, 2012

Beverly Chandler, Opalesque London: A new study, entitled Hedge Fund Herding and Crowded Trades: The Apologists’ Evidence from American academics Blerina Reca, from the Department of Finance at the University of Toledo, Richard Sias, Professor and Tyler Family Chair in Finance at the University of Arizona and H. J. Turtle from the Department of Finance at West Virginia University compares hedge funds’ propensity to engage in herding and crowded trades with other institutional investors.

Sias comments on the study, that hedge funds are widely viewed as the bad guys, trading excessively, herding to the latest fad, and crowding into the same trades, behaviour which leads to excess volatility and driving prices from fundamental value.

Sias writes: "This widely-accepted view of hedge funds, however, is driven by anecdotes rather than evidence. In the first study of its kind, we compare hedge funds’ propensity to engage in herding and crowded trades to other institutional investors. Not surprisingly, we find that hedge funds’ role in the market dramatically increases over time and hedge funds have much higher turnover than other professional investors". However, the research revealed other traits, inconsistent with hedge funds’ public perceptions, such as:

  • Other (non-hedge-fund) professional investors herd into and out of the same stocks to a much greater degree than do hedg......................

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