Standing Out From the Crowd: Measuring Crowding in Quantitative Strategies

Hierarchical Causality in Financial Economics

“…The dynamic nature of goals, conditioned on past information, may cause groups of agents to herd based on common objectives 22 . Here the behaviours of agents are based on the information variables, Z k,t and θ i,m,t , and shared-risks r p,t , with goals updated based on past states of the system as well.…”

The Impact of Crowding in Alternative Risk Premia Investing

“…To test these hypotheses, I used the pairwise correlation of factor-adjusted returns of assets in the same peer group (outperforming assets, undervalued assets, and so on) as a metric for crowding. This metric was motivated by the recent work of Cahan and Luo (2013); Lou and Polk (2014); and Huang, Lou, and Polk (2018). I provide empirical evidence in line with these hypotheses.…”

“…Data and Strategy Construction. The academic literature on the topic of crowding has so far mainly focused on equity universes (Cahan and Luo 2013;Lou and Polk 2014;Huang et al 2018). In an attempt to establish pervasiveness and robustness for my findings, I expanded the focus to various asset classes and risk premia strategies.…”

“…9. Cahan and Luo (2013), Lou and Polk (2014), and Huang et al (2018) estimated similar metrics of comovement but used only the top or the bottom factor basket. I consider the joint metric to be a more appropriate metric of comovement because it not only captures the comovement within these two baskets but also accounts for the cross-effects.…”

Factor Crowding and Liquidity Exhaustion

“…Previous studies have concentrated on returns, and the primary question of interest has been whether active investors have driven expected profits to zero as increasingly aggressive arbitrage corrects mispricing. Examples of studies focused specifically on the profitability of potentially crowded equity trades include Gustafson and Halper () and Cahan and Luo (), and the evidence they provide suggests that the factors they study are not significantly crowded in this sense. Further evidence comes from Verbeek and Wang (), who demonstrate that using quarterly disclosures mandated by the U.S. Securities and Exchange Commission (SEC) to mimic the holdings of active mutual funds provides the same performance as the target funds, and hence the strategies appear to have excess capacity.…”