investment viewpoints

Crowding, timing and dispersion: a framework for ARP

Crowding, timing and dispersion: a framework for ARP
Serge Tabachnik - Head of Research, Multi-Asset

Serge Tabachnik

Head of Research, Multi-Asset
As part of its on-going, quantitative research initiative, Lombard Odier Investment Managers invited Nick Baltas for an interactive session at the firm to meet our quantitative teams from New York, London, Geneva and Hong Kong.
A visiting academic at Imperial College Business School since 2012, Baltas is also head of R&D, Systematic Trading Strategies at Goldman Sachs International. He earned a PhD in Finance from Imperial College Business School and has published extensively in academic journals1.

Baltas presented to the LOIM teams his research on the impact of crowding, timing, and performance dispersion in alternative risk premia (ARP) investing. Understanding these stylized facts is key for strategy design, portfolio construction and performance assessment, in his view. 

The presentation started with a brief empirical analysis of ARP performance in 2019 and the dispersion of outcomes witnessed in the ARP industry. This dispersion naturally raises questions about crowding and factor timing2.

The discussion then addressed the impact of crowding in systematic investing, as well as presenting a framework for investors to consider the timing of individual asset or strategy decisions, and how to tilt portfolios accordingly.

Baltas argues that crowding is a major concern for investors in the ARP space.

Baltas’s research, published in the Financial Analysts Journal, argues that crowding is a major concern for investors in the ARP space. By focusing on the distinct mechanics of various systematic strategies, he contributes a framework that provides insights on the implications of crowding on strategy performance. Understanding such implications is key for strategy design, portfolio construction, and performance assessment.

His 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.

We believe such research aids investment managers to improve all aspects of the investment process, from strategy design and portfolio construction, through to assessing returns.



For an overview of papers, please see: 
Crowding refers to the size/trades of a specific industry vs the overall market size/trades and is inherently connected to market impact. Factor timing refers to getting in and out of position based on factor models such as Fama & French (1988).

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