Perspectives on Hedge Fund Herding: A Survey of Analytical Methods

Abstract

This article examines herding among hedge fund styles and uncovers new intuitions about the industry. By examining hedge fund style index returns using four techniques, we show that perceptions of herding may differ based on the choice of analytical method. Our analysis with independent component analysis is new, and we show that over time the various styles have evolved to meet the variance expectations of investors. We infer that hedge fund managers are adding value through techniques that deliver consistent returns derived from idiosyncratic factors that appear in higher moments.