The Impact on Stock Returns of Crowding by MutualFunds

• DOI: 10.3905/jpm.2017.43.4.087
• Publication Date: 2017-07-26T13:01:50Z
• Authors: Ligang Zhong; Xiaoya (Sara) Ding; Nicholas S.P. Tay
• Keywords: Crowding; Equity; Crowding out; Stock (firearms); Mutual fund; Position (finance)

Evidence from recent financial debacles suggests that crowding can adversely impact the subsequent performance of crowded investments and destabilize markets. However, term "crowding" has been used loosely in public media. To be precise, authors define develop a measure captures interaction correlated trades illiquidity use this metric to study how on stocks by mutual funds affects returns for period 1981 2012. They find strong negative association between quarterly two quarters ahead. More in-depth analysis reveals long–short portfolio with long position least short most earn an annualized abnormal return as high 14.53% after adjusting size, book market, momentum characteristics. The further confirm substantial are not driven time-varying expected returns. Surprisingly, mostly attributed stocks, which have characteristics resembling neglected funds. demonstrate their is improvement over liquidity conveys important signals beyond what embedded turnover. <b>TOPICS:</b>Fundamental equity analysis, fund performance, measurement