The Impact of Crowding in Alternative Risk Premia Investing
Financial Analysts Journal, Forthcoming
29 Pages Posted: 17 Apr 2019
Date Written: March 18, 2019
Crowding is a major concern for investors in the alternative risk premia space. By focusing on the distinct mechanics of various systematic strategies, we contribute to the discussion with a framework that provides insights on the implications of crowding on subsequent strategy performance. Understanding such implications is key for strategy design, portfolio construction, and performance assessment. Our analysis shows that divergence premia, like momentum, are more likely to underperform following crowded periods. Conversely, convergence premia, like value, show signs of outperformance as they transition into phases of larger investor flows.
Keywords: Crowding, Alternative Risk Premia, Divergence, Convergence
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation