Abstract
This paper investigates hedge fund herding at the industry level and its impact on industry returns. Although the level of industry herding on average is substantially weaker for hedge funds compared to non-hedge fund institutions, we find that industries that experience heavy herding by hedge funds experience return reversals in the long-run. We also provide evidence that non-hedge funds follow especially hedge funds’ sell herding industries in the subsequent quarters. We conclude that the long-run return reversals observed in hedge fund sell-herding industries are due to non-hedge funds’ failure to react to positive news in subsequent quarters in a timely manner.
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