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Digital Subscriptions > The Hedge Fund Journal > Issue 142 – Aug 2019 > Packed In Like Sardines

Packed In Like Sardines

How crowding in trade flow can adversely affect execution costs

Executive summary

Alternative Risk Premium strategies have received investor attention over the past few years and consequentially assets allocated to these strategies have increased. This, in turn, has given rise to a fear of concentration, most commonly referred to as crowding. Moreover, a spell of modest returns – especially in 2018 – has led investors to question the efficacy of these strategies, with the blame for sub-par performance often ascribed to crowding. Investors are not only concerned that a crowded market or strategy results in deteriorating returns as participants chase the same opportunities, but that sell-off risk, when large positions in the same assets are liquidated at the same time, also increases. In this note, we instead discuss a simple, yet real example of how crowding in trade flow may result in deteriorating returns by increasing the cost of execution. We show how, with a dedicated and bespoke execution solution, we can reduce some of the risk that arises from participating in a crowded trade.


The topic of crowding has garnered much attention of late, with many investors fretting about the consequences for Alternative Risk Premium (ARP) strategies. Any strategy could be called ‘crowded’ if too much capital is deployed in said strategy given its usual reward and market liquidity [1]. This crowding is generally thought of as being in the positions of an asset, while less literature exists on the subject of crowding in typical trade flow.

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.