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 (ie, buying and selling the same stocks at the same time). We 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. We also find relatively weak evidence that funds tended to buy and sell the same stocks at the same time.(JEL G14, G23)

The amount of wealth managed by institutional investors has grown considerably over the past 20 years. Due perhaps to decreased trading costs, brought about by the termination of fixed commissions in May 1975, these institutional investors have become much more active traders and, as a result, have become increasingly important in terms of setting market prices.'The growing influence of institutional investors has led to increased scrutiny both by policymakers and by journalists, who tend to believe that these investors trade excessively and move in and out of stocks in a herd-like manner. This tendency to invest with