Anti-herding by hedge funds and its implications for expected returns #

Utilizing a dataset of 1,899 U.S. hedge funds, we present evidence of anti-herding be-haviour among the U.S. hedge fund managers. Hedge funds anti-herd irrespective of mar-ket volatility and credit deterioration conditions although funding illiquidity has a stronger effect on the formation of anti-herding behaviour across the majority of hedge fund schemes analysed. More importantly, we document significant economic implications of anti-herding and show that hedge funds associated with high degree of anti-herding earn significantly higher excess returns over those with low degree of anti-herding, particu-larly in the intermediate and long horizons up to one year. At the same time, hedge funds that anti-herd experience greater idiosyncratic volatility in subsequent periods, presenting a novel perspective to the relationship between anti-herding, idiosyncratic volatility and expected returns. While the finding of anti-herding in the hedge fund industry is not un-expected as the main attraction of hedge funds is to devise proprietary trading strategies that is based on private information, our findings provide novel insight to the link be-tween idiosyncratic volatility and expected returns in the context of anti-herding in the hedge fund industry. (c) 2023 Elsevier B.V. All rights reserved.