Allocators who are unaware of hedge fund clustering and hedge fund crowding may be investing in an undifferentiated pool of consensus bets and paying high fees for closet indexing. Hedge fund crowding has internal structure – clusters of funds with shared systematic (factor) and idiosyncratic (residual) bets. We examine the largest hedge fund cluster in which: two […]
Extraordinary Popular Delusions and the Madness of Crowding U.S. hedge funds share a few systematic and stock-specific long bets. These crowded bets are the main sources of aggregate long hedge fund relative performance as well as many individual funds’ returns. Two risk factors and six stocks are behind most of this herding. The crowded stocks […]
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 […]
Our June 2015 piece listed SunEdison (SUNE) and Micron (MU) among the top ten stocks driving hedge fund risk and alpha. In the semiconductor sector, they were virtually the sole drivers. In addition, since mid-2014 semiconductor sector alpha for hedge funds has been sharply negative. Extreme semiconductor sector crowding and threat of liquidation were ominous […]
The 2014-2015 energy carnage has been worse for crowded hedge fund energy positions than the global financial crisis. Past liquidations of crowded hedge fund bets were followed by rapid recoveries. Consequently, energy investors should survey the wreckage for opportunities. Crowded hedge fund oil and gas producers underperformed their sector peers by over 20% since 2013 as […]
Real-world restrictions on hedge fund investing wreak havoc on common allocation strategies Common return measures fail to predict future hedge fund performance. More important, under typical allocation and withdrawal constraints, these failures due to mean reversion become more severe: Portfolios based on top nominal returns and win/loss ratios tend to under-perform. Portfolios based on top Sharpe ratios don’t outperform. […]
Due to the congestion of their investor base, crowded hedge fund stocks are volatile and vulnerable to mass selling. The risk-adjusted performance of consensus bets tends to disappoint. In two past pieces we illustrated the toll of crowding on exploration and production as well as internet companies. We also reviewed two specific crowded bets: SanDisk and […]
U.S. hedge funds share a few systematic and idiosyncratic long bets – a phenomenon called “crowding.” Hedge fund crowding within specific sectors can be heavy; bets on exploration and production (E&P) companies are particularly crowded. Hedge fund E&P bets are the subject of this article. Eight stocks are responsible for three quarters of the herding. Crowding is […]
U.S. hedge funds share a few systematic and idiosyncratic long bets – a phenomenon called “crowding.” Crowding exists within aggregate portfolios and within specific sectors. Energy bets are particularly crowded and are the subject of this article. Crowded bets are the main sources of hedge funds’ collective and many individual funds’ energy sector returns. Four […]
For Many Equity Funds, Bond Risk is More Important than Industry and Style This year, equity fund investors have been reading – and will soon read more – quarterly letters lamenting volatility and poor performance. The true reasons are rarely identified. Portfolio managers themselves may not fully understand the causes. The hidden bond exposure in […]