If you’ve been keeping an eye on the performance of hedge funds and mutual funds over the past 12 months or so you will have noticed that one of the themes in performance that’s become clear is the underperformance of funds with the highest allocation to crowded positions.
Earlier this week ValueWalk reported on a research note from Bank of America, which showed that the first half of 2016 was the worst first half performance for large-cap active fund managers on record (using data going back to 2003). Just 18% of large-cap funds outperformed the Russell 1000 during the first half of the year. One of the key contributing factors to this trend is the performance of crowded stocks compared to neglected stocks. According to Bank of America’s figures, during the first half of 2016 the ten most crowded stocks in the large cap funds space lagged the ten most neglected by 18 percentage points.
This shouldn’t come as a surprise to anyone that’s been following crowded position reports or performance this year. Another report from Bank of America at the beginning of 2016 showed that the ten most crowded positions in the US equity markets underperformed the ten most neglected by about 7% for the period under consideration. Another report, this time published in the FT citing data from Bloomberg, showed that between July 2015 and the beginning of May this year stocks in which hedge funds had the largest ownership percentage in the Russell 3000 index fell a 31%.
Looking at these figures it is possible that if you want to outperform in today’s market, a strategy of shorting the most crowded positions and going long the most neglected stocks could be highly lucrative.
Outperform with a crowded positions strategy
UBS’s Prime Brokerage crowded position report is the perfect place to start building such a strategy. The report identifies the top 25 most crowded long and short positions on the bank’s prime brokerage books for each major region, based on the weekly average of the previous five business days.
Globally the most crowded long on UBS’s prime brokerage books is Alphabet Inc, Facebook Inc takes the second spot followed by SABMiller Plc, Imperial Brands Plc, and Visa Inc. The most crowded global short is the SPDR S&P 500 ETF followed by Tesla Motors Inc then Alibaba Group, Commonwealth Bank of Australia and Woolworths Ltd.
In the US the most crowded longs are Alphabet Inc, Facebook Inc, Visa Inc, Apple Inc, Microsoft Corp, Alibaba Group Holding, Allergan Plc, Yahoo! Inc and Paypal Holdings Inc. While the most crowded shorts are: the SPDR S&P 500 ETF, Tesla Motors Inc., Alibaba Group, WW Grainger Inc., Boeing Co, Deere & Co, Marriott International, Netflix Inc., National Oilwell Varco Inc. And Ball Corp.
And in the Europe the top ten crowded longs and shorts as according to UBS: