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Academic Review

Crowded Trades and Tail Risk

We collaborated with researchers from University of North Carolina at Chapel Hill and Wake Forest University for this research study, wherein we examine the effect of hedge fund concentration on risk and return.


A growing body of research examines the implications of common holdings for asset price determination; however, far less is known about the impact of hedge fund ownership concentration on risk and return. Yet, hedge fund positions are an important component of the degree of crowdedness because these investment vehicles tend to be particularly active in their pursuit of outperformance, they often take highly concentrated positions, and they utilize leverage and short sales. Using a large database of U.S. equity position-level holdings for hedge funds, we measure the degree of security level crowdedness. We construct a new factor by taking the difference between returns of high and low crowdedness portfolios. The average return on the crowdedness factor is sizable, and its variation is distinct from other traditional risk factors for U.S. equities. When hedge fund returns are regressed onto other risk factors and the crowdedness factor, the exposures to the latter are statistically and economically significant in explaining hedge fund return variation. Most important, the crowdedness factor is related to downside “tail risk” as stocks with higher exposure to crowdedness experience relatively larger draw downs during periods of market distress. This tail risk extends to hedge fund portfolio returns as the crowdedness factor explains why some funds experience relatively large drawdowns.


  • Christian Lundblad |    Director, Senior Fellow, IPC; Edward M. O’Herron Distinguished Scholar and Professor of Finance, University of North Carolina, Kenan-Flagler Business School
  • Philip Howard, Ph.D. |    Senior Research Associate and Professor of Finance, Wake Forest University
  • Greg Brown |    Research Director, IPC; Professor of Finance, Sarah Graham Kenan Distinguished Scholar, University of North Carolina, Kenan-Flagler Business School