Crowded Trades and Tail Risk

85 Pages Posted: 13 Feb 2019 Last revised: 19 May 2021

See all articles by Gregory W. Brown

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Philip Howard

Wake Forest University - School of Business; University of North Carolina (UNC) at Chapel Hill - Frank Hawkins Kenan Institute of Private Enterprise

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Date Written: June 2, 2019

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 their variation 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.

Keywords: Hedge Fund, Crowded Trade

JEL Classification: G11, G23

Suggested Citation

Brown, Gregory W. and Howard, Philip and Lundblad, Christian T., Crowded Trades and Tail Risk (June 2, 2019). Available at SSRN: https://ssrn.com/abstract=3326802 or http://dx.doi.org/10.2139/ssrn.3326802

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Philip Howard

Wake Forest University - School of Business ( email )

Farrell Hall 363
1834 Wake Forest Rd
Winston-Salem, NC 27109
United States

HOME PAGE: http://www.philiphoward.info

University of North Carolina (UNC) at Chapel Hill - Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Christian T. Lundblad (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

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