Crowded trades, susceptible to high volatility, result in risks often overlooked by investors. Crowded trades happen when multiple market participants trade the same securities or while employing similar strategies. While this can drive the price of a stock up during the accumulation phase, this can also create liquidity shortages resulting in forced selling at fire sale prices when that same stock moves out of favor. This is particularly risky for a Momentum strategy which can turn on a dime and drive stocks down sharply.
How does one avoid crowded trades? Knowing how many competitors have similar strategies to yours is powerful information when it comes to uniquely positioning your fund to investors. Demonstrating who your competitors are, where there is overlap and where there are differences is key to both winning assets and avoiding the crowds. Conducting this research can be very time-consuming and finding one tool that instantly compares funds on a wide variety of metrics has been nearly impossible. Until now.
Similyzer™ is a new first-of-its-kind tool in investment management for instant comparison of funds on a wide variety of metrics like factor exposure, performance, risk measures and ESG scores. Using fund holdings, it quickly searches for similarities and differences among over 28,000 funds and gives you deep intel into competitive funds.
One of our NYC based clients, an active asset manager with a global reach and a multi-boutique approach, uses Similyzer™ to create their competitive landscape and positioning story. They like how the tool instantly shows them how crowded their space really is – or isn’t. They use this information to craft smarter responses to RFP questions to compete better and win more mandates.
In this competitive industry, no stone can be left unturned, and managers who provide this kind of transparent analysis are viewed as more trustworthy and worthy of investment allocations.