Crowded Trades and Tail Risk

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Concentrated positions in investment assets, often referred to as “crowded trades", are increasingly a topic of interest to investors and regulators. The concern centers around self-reinforcing downward price pressure resulting from liquidation of concentrated positions by vulnerable asset owners. But, do concentrated positions cause their own risk? This paper seeks to shed new light on the significance of crowded trades, fire sales, and downside risk by utilizing a large dataset of equity public holdings by hedge funds.