Not All Herding is the Same : Mutual Fund Active and Passive Herding to Anticipated Risks and Risk Shocks

Applying previous theoretical predictions on herding and market signals, we examine mutual fund herding from a perspective of anticipated risks and risk shocks. Funds herd when expecting risk but scatter as risk strikes surprisingly. We measure fund herding using cosine similarity of liquidity-adjusted trades and classify funds into five groups with Independents in the middle. Not all herders are the same as funds with different herding tendencies vary significantly in performance and fund-specific characteristics. We further distinguish true ‘active’ and real ‘passive’ herders who perform differently. Fear of missing out in up markets and persistence exist in fund herding too