Crowding and Factor Returns

Abstract

This paper documents that crowding by market participants affects the expected return to popular factor strategies such as value, momentum, and carry. Using data published by the CFTC for commodity futures markets, we construct a direct measure of factor strategy crowding that is based on the aggregate positioning of market participants. We show that this crowding measure has a strong negative predictive impact on expected factor strategy returns. Historical factor strategy returns are accumulated primarily during periods of low crowding. We link variation in our crowding measure to macroeconomic fundamentals and suggest that the reduction of factor strategy returns is related to variation in the cost of arbitrage capital.

Keywords: Crowding, Factor Investing, Carry, Momentum, Value, Commodity Futures, Commodities

JEL Classification: G11,G13