Social trading platforms vs. mutual funds: herding tendencies and portfolio risks

Abstract

This paper compares herding behavior between mutual funds and social trading platforms, where retail investors manage others' money, and examines its implications for risk co-movements. Utilizing unique social trading data alongside mutual fund data, we find that social trading portfolio managers exhibit less herding than mutual fund managers according to a transaction-based herding measure. However, a market-based herding measure reveals no significant difference in herding behavior, highlighting a limitation in the robustness of the transaction-based approach. We discuss factors influencing herding behavior in the social trading environment, suggesting higher overconfidence in social trading as a key factor. From an investor perspective, herding behavior can align portfolios, increasing the likelihood of common crisis events. Although we do not find a statistically significant relationship between the degree of herding and the likelihood of joint crisis events, our findings indicate that social trading portfolios have a 5.63 percentage point lower likelihood of joint crisis events compared to mutual funds.