Aswath Damodaran on Herding Behavior

I have read Aswath’s blog a few times and I am adding it to our blogroll today. He is a professor of finance at NYU’s Stern School of Business and has spoken at CFA Institute conferences. His comments on last week’s Wall Street Journal article on the herding behavior of hedge funds are in the mainstream of findings by behavioral finance experts. Here is the quote that resonated with me:

“It is easier to stand alone, if you know something that others do not or have a unique skill that gives you a leg up on the competition. The hedge fund story is revealing. Note that the herding behavior has increased as the hedge fund business has grown and collective performance has suffered. Much as we like to attribute superior skills to hedge fund managers, the herding behavior suggests that the average hedge fund manager has no competitive edge to speak off and seems to know it.” 

That is, most hedge fund managers are not contrarian value investors but instead are asset gatherers like most in the mutual fund and brokerage industries. Hence they seek to avoid “diverse performance” as Peter Lynch liked to say.

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