TY - JOUR T1 - The Impact on Stock Returns of Crowding by Mutual<br/>Funds JF - The Journal of Portfolio Management SP - 87 LP - 99 DO - 10.3905/jpm.2017.43.4.087 VL - 43 IS - 4 AU - Ligang Zhong AU - Xiaoya (Sara) Ding AU - Nicholas S.P. Tay Y1 - 2017/07/31 UR - https://pm-research.com/content/43/4/87.abstract N2 - Evidence from recent financial debacles suggests that crowding can adversely impact the subsequent performance of crowded investments and destabilize financial markets. However, the term “crowding” has been used loosely in the public media. To be precise, the authors define and develop a measure of crowding that captures the interaction of correlated trades and illiquidity and use this metric to study how crowding on stocks by mutual funds affects the subsequent returns on the stocks for the period from 1981 to 2012. They find a strong negative association between the crowding measure and the quarterly returns two quarters ahead. More in-depth analysis reveals that a long–short portfolio with a long position in the least crowded stocks and a short position in the most crowded stocks can earn an annualized abnormal return as high as 14.53% after adjusting for size, book to market, and momentum characteristics. The authors further confirm that the substantial abnormal returns are not driven by time-varying expected returns. Surprisingly, the abnormal returns can mostly be attributed to the least crowded stocks, which have characteristics resembling stocks neglected by mutual funds. They demonstrate that their crowding measure is an improvement over the liquidity measure and conveys important signals beyond what is embedded in turnover.TOPICS: Fundamental equity analysis, mutual fund performance, performance measurement ER -