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Industry Analysis

How Has Crowding Changed Over Time?

In this article, we'll visualize historical crowdedness to get a stronger idea of how each sector has changed since 2004.

Alex Chadwick
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Investors of all types are beginning to focus on crowdedness as an essential risk factor. As we’ve discussed in previous research pieces, a crowded security or portfolio is risky because its returns can be drastically affected by the buy or sell decisions of its holders. Interestingly, we have found that securities favored by hedge fund managers have outperformed relative to the S&P 500, though with higher volatility and periods of prolonged drawdowns.

Crowdedness is a measure of a security’s popularity and illiquidity. At Novus we calculate a crowdedness score for each position in our Hedge Fund Universe. The HFU is a proprietary portfolio based on the aggregate holdings of  ~1,300 Managers. The crowdedness score for each position is a percentile ranking from 0 to 1, derived using A) total number of owners and B) the percentage of shares outstanding that these owners collectively hold. For a more detailed explanation of the methodology please see The Novus Guide to Crowding.

In addition to providing a means by which to compare individual securities at a point in time, the Novus crowdedness score allows us to track how the crowdedness of hedge fund holdings has changed over time.

Total Portfolio

Below you can see how the distribution of crowdedness scores has changed over time:

how has crowding changed over time

The obvious cluster shows hedge funds in aggregate are holding more of the same names in their portfolios than previously. The increasing negative skew is also visible in the below chart of median crowdedness scores over time.

how has crowding changed over time

Interestingly, the crowdedness of reported short interest positions has very closely matched that of long positions. While this graph sends a strong message about hedge fund holdings in aggregate, it does not tell us if there is any particular driver.

Sector Crowdedness Change

There has clearly been a general trend towards higher crowdedness in the total HFU portfolio. While aggregate crowdedness is certainly worth investigating, it’s also interesting to see how crowdedness has changed across sectors.

Information technology experienced the largest increase in aggregate crowdedness. Median crowdedness moved from .65 to .80 over the last 12 years. In addition, the four most-held securities are all IT names. Overall, Facebook is the most held name in the HFU, with an impressive 237 hedge funds currently investing. It’s followed closely by Alphabet, Microsoft, and Apple.

how has crowding changed over time

Below we show the distribution of crowdedness scores across additional sectors to see how crowdedness has shifted from 2004 to present. Keep in mind, however, that these charts do not show inter-period movements, only snapshots.

how has crowding changed over time

As of today, healthcare boasts the highest median crowdedness, rising from .72 to .82 since 2004.

Crowdedness has risen over time, and this piece was designed to visualize those shifts. It’s important to remember that crowdedness is neither good nor bad—as we’ve discussed in several research papers and blog posts, the industry is still somewhat unsure of how they should react to crowding, or how it has affected their portfolios. After this analysis, however, one thing is clear—there has been an obvious movement towards consensus investments and a “herd” mentality amongst institutional investors.

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