An academic study of the holdings of hedge funds that file so-called '13f reports' with the US Securities and Exchange Commission has found that they herd into the same positions less than other investment institutions, have less portfolio overlap, and are less likely to engage in momentum trading.
Contrary to popular perception and some previous academic studies, 'Hedge Fund Herding and Crowded Trades: The Apologists' Evidence', published by the Social Science Research Network (SSRN), found that, on average, "hedge fund demand appears to push prices towards equilibrium, whereas non-hedge fund institutions' demand pushes prices away from equilibrium".
The point of the study is that it does find herding and crowding, "just to a much lesser extent, on average, than other institutional investors". In this respect, the new study does not necessarily contradict previous studies that have raised the possibility that sophisticated investors can move market pricing away from Fundamentals. However, the paper does find that hedge funds' "herding propensity", defined according to a metric developed by the authors, is eight-times less than that of non-hedge fund institutions.
Moreover, while non-hedge fund institutional herding is positively related to market stress, the same is not true of hedge funds' herding. Testing to find whether or not hedge funds "herd to the same ideas" – resulting in crowded trades – the authors compare the portfolio overlap for every pair of hedge funds with the portfolio overlap for every pair of non-hedge fund institutions. They find that the average non-hedge fund pair exhibits four-times the overlap of the average hedge fund pair.
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