Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior

TLDR

The study examines whether mutual funds trade stocks based on past returns and whether they exhibit herding behavior. The authors find that 77 % of funds are momentum investors, that they rarely sell past losers, that momentum‑based funds outperform others, and that evidence of herding is weak. © 1995 American Economic Association.

Abstract

This study analyzes the extent to which mutual funds purchase stocks based on their past returns as well as their tendency to exhibit 'herding' behavior (i.e., buying and selling the same stocks at the same time). The authors find that 77 percent of the mutual funds were 'momentum investors,' buying stocks that were past winners; however, most did not systematically sell past losers. On average, funds that invested on momentum realized significantly better performance than other funds. The authors also find relatively weak evidence that funds tended to buy and sell the same stocks at the same time. Copyright 1995 by American Economic Association.