Whereas hedge fund crowding primarily consists of systematic factor bets, most analysis of hedge fund crowding focuses solely on popular positions. Moreover, such analysis usually assumes that hedge fund crowding in individual stocks is a bullish indicator. This article illustrates the flaws of these common assumptions, identifies the principal sources of hedge fund crowding, and […]
A typical analysis of hedge fund crowding considers large, popular, and concentrated hedge fund long equity holdings. Such analysis usually assumes that crowding comes from stock-specific bets and that it is a bullish indicator. These assumptions are incorrect and have cost investors dearly: Residual, idiosyncratic, or stock-specific bets now account for less than a third […]
A typical analysis of hedge fund crowding surveys popular equity holdings. Yet, such residual, idiosyncratic, or stock-specific bets account for only 31% of current hedge fund crowding. Factor (systematic) risk, rather than a few specific stocks, is driving absolute and relative returns. Consequently, most analysis of hedge fund crowding focuses on a small fraction of […]
Whereas most analysis of hedge fund crowding focuses on individual stocks, over 85% of hedge funds’ recent long equity variance has been due to their factor (systematic) risk. Residual, idiosyncratic, or stock-specific bets accounted for less than 15%. Thus, factor crowding has dominated hedge fund industry’s absolute and relative returns. This article reviews the most […]
Typical analysis of hedge fund crowding focuses on individual stocks. This is misguided since over 85% of hedge funds’ monthly return variance is due to factor (systematic) exposures. Their residual, (idiosyncratic, or stock-specific) bets account for less than 15% of it. Likewise, factor crowding has driven much of the hedge fund industry’s performance and volatility. […]
Analyses of hedge fund crowding typically focus on hedge funds’ individual positions (their residual, idiosyncratic, or stock-specific exposures). Yet, over 85% of the monthly return variance for the majority of hedge fund long equity portfolios is due to their factor (systematic) exposures. Stock-specific bets account for less than 15%. Factor – rather than residual – […]
Most analyses of hedge fund crowding focus on their residual (idiosyncratic, stock-specific) bets. This is misguided, since over 85% of the monthly return variance for the majority of hedge fund long equity portfolios is due to factor (systematic) exposures, rather than individual stocks. Indeed, it is the exceptional factor crowding and the record market risk that […]
Since crowded stocks are prone to mass liquidation, investors are typically most concerned with residual (idiosyncratic, stock-specific) hedge fund crowding. This overlooks the exceptional factor (systematic) crowding and the record market risk that have been driving recent industry performance. In Q3 2015, when a single factor and a single stock accounted for over half of […]
The Virtuous and Vicious Cycles of Crowding Hedge Fund Crowding has cost investors $12 billion in the first 10 months of 2015, and $9 billion in the August-October 2015 rout. That is to say, tractable hedge funds’ long U.S. equity portfolios have suffered severely negative active return from security selection (alpha, or αReturn) this year, […]
Applying a robust risk model to hedge fund holdings data helps avoid losses and yields profitable opportunities. In this article, we highlight the sectors with the largest Hedge Fund losses due to crowding in Q3 2015, which sum to $4 billion. Our methodology provides an early-warning system for losses in crowded names. This analysis also […]