Hedge Fund Herding in Currency Futures

I study hedge fund herding patterns in currency futures contracts and find evidence of herding. High-interest (low-interest) currencies exhibit higher buy-side (sell-side) herding, consistent with carry trade positions. A strategy herding measure is then proposed that is used to track hedge fund herding in the carry trade strategy. I find that hedge fund carry trade strategy herding positively predicts future returns, a result that is robust to a host of other activity measures. I do not find hedge fund herding to be destabilizing, and investors can improve performance by following hedge fund herding behaviour in the carry trade