The Impact of Crowding in Alternative Risk Premia Investing

Crowding is a major concern for investors in alternative risk premia. By focusing on the distinct mechanics of various systematic strategies, this study introduces a framework that provides insights into the implications of crowding for subsequent strategy performance. Understanding such implications is key for strategy design, portfolio construction, and performance assessment. The analysis shows that divergence premia, such as momentum, are more likely to underperform following crowded periods. Conversely, convergence premia, such as value, show signs of outperformance as they transition into phases of larger investor flows.Editor’s NoteSubmitted 19 September 2018Accepted 20 March 2019 by Stephen J. BrownDisclosure: The opinions and statements expressed in this paper are those of the author and may be different to views or opinions otherwise held or expressed by or within Goldman Sachs. The content of this paper is for information purposes only and is not investment advice or advice of any other kind. None of the author, Goldman Sachs, or its affiliates, officers, employees, or representatives accepts any liability whatsoever in connection with any of the content of this paper or for any action or inaction of any person taken in reliance upon such content or any part thereof. An earlier version of this paper was previously published by Goldman Sachs under the title “The Impact of Crowding in Systematic ARP Investing” (7 June 2018).This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the author thanked the reviewers in his acknowledgments. Robert Faff was one of the reviewers for this article.