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Implicit incentives and reputational herding by hedge fund managers

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  • Boyson, Nicole M.

Abstract

Several theories of reputation suggest that managers' incentives affect their propensity to engage in herding behavior. This paper investigates these theories by tracking hedge fund managers' herding behavior over their careers. I first examine managerial incentives for herding, and show that more senior managers that deviate from the herd have a significantly higher probability of failure and do not experience higher fund inflows than their less-senior counterparts. These implicit incentives should encourage managers to herd more as their careers progress. I find strong support for this hypothesis: using a number of proxies for herding, I show that more experienced managers herd more than less-experienced managers. Finally, I examine performance differences between more and less-experienced managers, and find that while more experienced managers underperform less-experienced managers, this underperformance does not appear to be caused by differences in herding. Overall, these results are in direct contrast with studies of mutual fund managers, reflecting important difference in implicit incentives between the two industries.

Suggested Citation

  • Boyson, Nicole M., 2010. "Implicit incentives and reputational herding by hedge fund managers," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 283-299, June.
  • Handle: RePEc:eee:empfin:v:17:y:2010:i:3:p:283-299
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    References listed on IDEAS

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    Cited by:

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    2. repec:eee:jbfina:v:87:y:2018:i:c:p:351-368 is not listed on IDEAS
    3. repec:taf:oaefxx:v:3:y:2015:i:1:p:1024022 is not listed on IDEAS
    4. Amparo Soler Domínguez & Juan Carlos Matallín Sáez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression approach," Working Papers. Serie EC 2013-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    5. repec:eee:jebusi:v:94:y:2017:i:c:p:32-42 is not listed on IDEAS
    6. Denitsa Stefanova & Arjen Siegmann & Marcin Zamojski, 2014. "Hedge Fund Innovation," LSF Research Working Paper Series 14-13, Luxembourg School of Finance, University of Luxembourg.
    7. Huang, Teng-Ching & Lin, Bing-Huei & Yang, Tung-Hsiao, 2015. "Herd behavior and idiosyncratic volatility," Journal of Business Research, Elsevier, vol. 68(4), pages 763-770.
    8. Bizer, Kilian & Meub, Lukas & Proeger, Till & Spiwoks, Markus, 2014. "Strategic coordination in forecasting: An experimental study," Center for European, Governance and Economic Development Research Discussion Papers 195, University of Goettingen, Department of Economics.
    9. J. Carlos Matallín-Sáez & Amparo Soler-Domínguez & Emili Tortosa-Ausina, 2013. "Does active management add value? New evidence from a quantile regression," Working Papers 2013/01, Economics Department, Universitat Jaume I, Castellón (Spain).

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