The Impact of Crowding on Alternative Risk Premiums
We present a cool academic paper written by Nick Baltas, which shows which alternative risk premias are more susceptible to bad performance after periods of high crowding (and which on the other hand perform better) …
Shortly:
“ Crowding is a major concern for investors in the alternative risk premia space. By focusing on the distinct mechanics of various systematic strategies, we contribute to the discussion with a framework that provides insights on the implications of crowding on subsequent strategy performance. Understanding such implications is key for strategy design, portfolio construction, and performance assessment. Our analysis shows that divergence premia, like momentum, are more likely to underperform following crowded periods. Conversely, convergence premia, like value, show signs of outperformance as they transition into phases of larger investor flows.”
