1/ Crowding and Factor Returns (Kang, Rouwenhorst, Tang)

"We construct a direct measure of factor strategy crowding that is based on CFTC aggregate positioning. Crowding measure has a strong negative predictive impact on expected factor returns."

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3803954
2/ Crowding at the commodity level = excess speculative pressure (deviation of non-commercial tradersā€™ positions from the 52-week average, scaled by open interest)

"We will show that it is straightforward to aggregate individual commodity crowding to the factor strategy level."
3/ "Speculative positions show substantial short-term variation (Ļƒ ā‰ˆ 15%) that is independent from accommodating the hedging demands of commercial traders, which are unlikely to vary substantially at the weekly horizon."
4/ "Individual commodity crowding has a strong predictive power on the subsequent returns in both univariate and multivariate specifications with controls."

Q = change in net long commercial long positions
SHP = smoothed component of hedging pressure
5/ "Average crowding levels are close to zero for value and basis strategies but positive for momentum.

"Momentum exhibits an upward trend in crowding over the sample. Based on our results from commodity-level crowding, this would predict a reduction of returns over time."
6/ "When crowding is low, momentum is highly profitable: its post-ranking return increases from 0.28% in the first week to 2.51% in week 13.

"In contrast, profitability is absent in periods of high crowding. Up to 13 weeks, cumulative momentum profits fluctuate around zero."
7/ "Sorting conditional on the full-sample median embeds a forward-looking bias. To address this concern, we also classify crowding levels by taking deviations from its trailing three-year (156-week) moving average.

"These findings mirror our conclusion from Table 3."
8/ "Controls have little impact on the size of the crowding coefficient.

"Crowding captures cumulative speculative pressure, while Q measures the recent change in pressure.

"A 1Ļƒ increase in strategy crowding lowers post-ranking 4-week momentum returns by 70bps (8% annualized).
9/ For value and basis strategies, "returns are significantly higher during weeks of low crowding
and lower when crowding is high. Stated differently, excess return to factors strategies in commodity futures primarily accrues during weeks when crowding is low."
10/ "These findings are unchanged when we remove the forward-looking aspect. Most of the positive average excess returns of the value and basis factors accrue in low-crowding weeks. Low or negative average returns are earned during episodes of high crowding."
11/ "As before, the predictive power of crowding is robust to the inclusion of controls. A 1Ļƒ increase of crowding of the value (basis) factor portfolio decreases the next-week strategy return by 19 (9) bps and next four-week return by 67 (33) bps, respectively."
12/ "Momentum has become more crowded and has also experienced low returns.

"Our results echo Hanson and Sunderam, who show that factor returns in equity markets decline when there is more capital allocated to short-interest positions that aligns with factor positions."
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