FIS Group: ForesIghtS The Hidden Risk in a Portfolio: Crowded Trades

PHILADELPHIA, PA, July 16, 2018 – FIS Group, a manager of U.S. and global developed, emerging and frontier markets equity portfolio strategies, today published its latest issue of ForesIghtS, ‘The Hidden Risk in a Portfolio: Crowded Trades.‘ It proposes mathematical techniques that allay the risks posed by crowded trades in volatile market environments.

“Today’s high-volatility environment is susceptible to crowded trades, when many people trade the same stock for the same reason,” says Tina Byles Williams, CIO and CEO, FIS Group. “While this drives up stock values initially, when the stock moves out of favor it can lead to forced selling at fire-sale prices.”

According to FIS Group, investment products that exacerbate crowding risk include quantitative hedge funds, smart beta products and exchange-traded funds (ETFs), which have grown substantially since the last financial crisis.

“The combined power of these products can suck up a stock’s liquidity, causing a major price drop in a selling environment. This leaves many investment managers exposed to the risk of greater-than-expected losses in a market downturn,” adds Byles Williams.

The ForesIghtS article discusses how investors can assess the overall crowding risk in their portfolios by using mathematical techniques, such as pairwise correlation, valuation dispersion and fractal dimension analysis. By analyzing the potential risks at a portfolio level, as opposed to an individual security level, these techniques illustrate the crowding risk associated with a particular manager or strategy.

For instance, a higher correlation between stocks in a portfolio with significant exposure to a certain factor, a wider spread between the top and bottom quintile stocks, and whether there is a high level of short-term activity are all indications of crowding risk.

Byles Williams states: “In a volatile market, identifying crowded trade risk can be the difference between success and failure. Investors need to deploy mathematical techniques to guard against any surprises during a sell-off.”

In addition to ForesIghtS, which examines global economic themes and are published throughout the year, Byles Williams contributes to FIS Group’s Market Outlook series on a quarterly basis.

About FIS Group

FIS Group is an investment management firm that provides customized manager of managers investment solutions for institutional investors. For 20 years, we have delivered risk-adjusted returns by conquering the complexity of identifying high skill, high active share entrepreneurial managers that have gone largely undiscovered by the institutional investor community. Unique among our peers, FIS Group enhances risk-adjusted returns by using macro strategy insights to allocate capital among the managers and/or through a global macro tactical completion strategy. Our culture is a fusion of relentless curiosity and a scientific, disciplined process.

For more information please visit us at xponance.com.

Investment professionals can look forward to future editions of ForesIghtS, published every two weeks, which will explore high-level strategic topics on the evolution of the investment management industry, the markets, economics and geopolitics. The series conveys FIS Group’s thought leadership on the markets, analysis tools, geopolitics, and other topics of interest within investment management. It provides investment professionals with a concise reflection on articles, papers or presentations that FIS Group finds relevant and interesting.