Thread by @ReformedTrader

1/ Impact of Crowding in Alternative Risk Premia Investing (Baltas)

"We create a framework to explore the implications of crowding. Divergence (convergence) premia like momentum (value) are tend to underperform (outperform) following crowded periods."

papers.ssrn.com/sol3/papers.cf…

2/ "When momentum is driven by net inflows, its turnover is likely to fall, as the investor remains positioned in the same assets.

"We hypothesize that crowding is more likely to have a destabilizing effect for divergence premia, as it can drive prices away from fundamentals."

3/ "Investors allocating to convergence premia have a natural anchor that signals the end of a profitable opportunity. Larger investor flows in can bring faster convergence of valuation spreads.

"We hypothesise that anchored strategies are more resilient to incoming flows."

4/ "Synchronous flows into a portfolio (from a large group of investors with similar objectives) should, all else being equal, increase co-movement.

"We estimate the signed average pairwise correlation between all residual returns of the assets in the top and bottom baskets."

5/ "Stocks in the top/bottom momentum and value baskets exhibit time-varying (yet statistically strong) cross-dependence, which can be interpreted as excess demand for these baskets.

"The time-series of the CoMetric is not constant over time but does not necessarily increase."

6/ "To directly relate current levels of crowdedness to future performance, we track buy-and-hold portfolios based on *current* ranks over the entire two-year horizon."

"All divergence premia underperform (outperform) following high (low) levels of asset excess comovement."

7/ "In line with our hypothesis and with the evidence for equity value, FX value benefits from increased asset co-movement."

"Value strategies offer support to our hypothesis that crowdedness has different implications for the profitability of different types of ARP strategies."

8/ "Our findings suggest that crowding is not always a catalyst for underperformance and should not be treated as such by investors.

"In unreported results, we find that divergence (convergent) premia exhibit higher (lower) volatility following crowded periods."