Risk premia

FACTOR CROWDING

Crowding refers to periods when factor strategies like value or momentum have received significant inflows and are held widely. The risk of owning a popular factor is that a sudden change in market sentiment may result in many investors selling the strategy simultaneously with few natural buyers left in the market, which tends to reflect in drawdowns. Crowded factors are therefore characterized by experiencing more frequent drawdowns in subsequent periods than uncrowded factors. Naturally this affects systematic and discretionary investors.

FactorResearch’s Factor Crowding Model measures when common equity factors are crowded, neutral or uncrowded. The model has the following features:

  • Identifies periods of factor crowding via five metrics: factor correlation, dispersion, volatility, valuation and momentum
  • Available for the following equity factors: Value, Size, Momentum, Low Volatility, Quality, Growth and Dividend Yield
  • All developed equity markets in US, Europe and Asia
  • Measured on a daily basis and best combined with a factor exposure analysis
  • Empowers investors to anticipate and potentially mitigate factor risks
  • Crowding model can also be applied to client stock portfolios on a customised basis
Factor Crowding Model

FACTOR CROWDING & DRAWDOWNS

The analysis below highlights that crowded factors exhibit a significantly higher probability of drawdowns than uncrowded factors across various time frames as measured by the Factor Crowding Model. Please see the white paper below for further details on the methodology and supporting analysis.

Multi-Metric Factor Crowding Model Probability of a 15% or Larger Drawdown

DOCUMENTATION

FACTOR CROWDING MODEL –
FACTSHEET

FACTOR CROWDING MODEL –
WHITE PAPER

FACTOR RISK MANAGEMENT –
WHITE PAPER

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