Measuring Mutual Fund Crowding and Its Effect on Stock Returns
Summary
The document reviews research on whether crowded mutual fund ownership predicts subsequent stock returns. It defines stock-level crowding as active mutual fund ownership divided by average share turnover, using lagged holdings and turnover data. Stocks are ranked into groups, and the strategy buys the least crowded group while shorting the most crowded group, with portfolio rebalancing each quarter.
In the reported US sample from 1981 through 2012, higher crowding is associated with lower future returns. The long-short results remain positive after adjustments for size, value, momentum, and common risk factors, and after tests for changing expected returns. Restricting the portfolios to subsets of the least and most crowded groups produces larger reported adjusted returns. The analysis also finds that crowding adds information beyond turnover-based illiquidity measures.
The review notes that much of the return comes from the long side, and attributes some of it to less-followed stocks. Results rely on historical US data and delayed public holdings disclosures; they do not establish that the effect will persist or transfer to other markets. The source itself cautions that the findings are not investment advice.
Key ideas
- Crowding is measured as active mutual fund ownership relative to average share turnover.
- Stocks with higher measured crowding had lower subsequent returns in the reported sample.
- A strategy buying the least crowded stocks and shorting the most crowded stocks retained positive reported returns after several risk adjustments.
- The reported effect persisted in comparisons that controlled for turnover-based illiquidity.
- Much of the strategy’s reported performance came from its long positions in less-followed stocks.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.