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Crowded Trades and Tail Risk

Author

Listed:
  • Gregory W Brown
  • Philip Howard
  • Christian T Lundblad

Abstract

Hedge fund positions are an important component of crowded trades. These vehicles are particularly active, take highly concentrated positions, and utilize leverage and short sales. Using a database of hedge fund holdings, we measure the degree of security-level crowdedness. The difference between the average returns on portfolios sorted by high versus low crowdedness portfolios is sizable, and the variation in the realized portfolio returns is distinct from other traditional risk factors. Further, hedge fund exposures to crowdedness are often significant, and they help to explain downside “tail risk,” as funds with higher exposures experience relatively larger drawdowns during periods of industry distress.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Gregory W Brown & Philip Howard & Christian T Lundblad, 2022. "Crowded Trades and Tail Risk," The Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3231-3271.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:7:p:3231-3271.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab107
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    Citations

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    Cited by:

    1. Anginer, Deniz & Ray, Sugata & Seyhun, H. Nejat & Xu, Luqi, 2024. "Expensive anomalies," Journal of Empirical Finance, Elsevier, vol. 75(C).
    2. Kieran Wood & Samuel Kessler & Stephen J. Roberts & Stefan Zohren, 2023. "Few-Shot Learning Patterns in Financial Time-Series for Trend-Following Strategies," Papers 2310.10500, arXiv.org, revised Mar 2024.
    3. Chi Zhang & Xinyang Li & Andrea Tamoni & Misha Beek & Andrew Ang, 2024. "ESG risk and returns implied by demand-based asset pricing models," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 203-221, May.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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