By now, you’ve undoubtedly heard the expression “a crowded trade.” This conjures up a vivid image of hordes of investors crushed into an already packed space. Although colorful and evocative, the expression is both confusing and ill-defined. Not surprisingly, it’s been used to characterize a wide variety of phenomena from overpriced stocks to momentum crashes. We attempt to better define the expression “a crowded trade” via a simple allegory: Hamilton tickets.
We believe that investors who wish to avoid the potential for a crowded trade should carefully examine whether an investment requires immediate and price-insensitive trading, whether the fundamental economic exposure is inherently illiquid (regardless of the investment instrument), and whether many other investors are in the same vehicle pursuing a strategy that might create a wave of simultaneous transactions.