Uncommon Value: The Characteristics and Investment Performance of Contrarian Funds

Kelsey D. Wei (), Russell Wermers () and Tong Yao ()
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Kelsey D. Wei: Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080
Tong Yao: Department of Finance, Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52242

Management Science, 2015, vol. 61, issue 10, 2394-2414

Abstract: Motivated by extant theories of herding behavior, this paper empirically identifies contrarian mutual funds as those trading most frequently against the crowd. We find that contrarian funds generate superior performance both when they trade against and with the herd, indicating that they possess superior private information. Furthermore, contrarians do not trade in a particularly correlated fashion with each other, consistent with these funds having disparate information. Our fund-level contrarian measure is largely unrelated to existing measures of fund strategy uniqueness, as both contrarian and herding funds score highly on such measures. Building on our finding of superior alphas for contrarian funds, we construct a stock-level contrarian score that reflects the aggregate stock selection information possessed by contrarian managers. This stock-level contrarian score significantly predicts stock returns after controlling for measures of stock-level herding, as well as a battery of return-predictive investment signals documented in prior studies. This paper was accepted by Wei Jiang, finance.

Keywords: mutual funds; contrarian investing; herding behavior (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (15)

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