The herd mentality of piling into asset classes favored by the large majority of investors is the rationale behind crowded trades. By definition, a crowded trade is an asset class or investment theme that has attracted an unusually large number of market participants.
Among the traits associated with a crowded traded is the promise of huge upside potential.
Typically, crowded trades are centered around large-cap stocks, with the affection toward them a result of their recognizable names and products, the relative ease of trading them and their appearance in indexes against which money managers are compared, according to a Barron's article.
A crowded trade, is however, fraught with risk, given the volatility that has come to characterize it. Positive sentiment toward a stock or any other asset class will result in traders flocking to a particular counter, leading to abnormal price gains. And when the sentiment is reversed, there is the danger of a free fall, as traders move out of the stock in droves.
Crowded trades begin to unravel, as some participants lose faith and liquidate their positions ahead of a potential large-scale selloff. The red signal glows when more participants decide to move out at the same time, resulting in staggering stock price declines, purely keeping up with the basic relation price has with demand and supply.
That said, it is not a given that the least crowded ones are less risky. There are some obscure investments, which may not attract a huge following, while at the same time posing risk.
However, information regarding the least and most crowded stocks is a gold mine for contrarians betting on turnarounds or for those seeking to profit off shorting stocks, which face the risk of being hit hard in the eventuality of a reversal in sentiment.
UBS in a note released this week highlighted stocks that are most overweight and underweight by global active fund managers, across different regions and countries.
Analyst Shanle Wu indicated that the active positions were measured using the institutional ownership data supplied by FactSet.
"Essentially, we sum up all the holdings in dollar value across all the active managers and calculate the weights of stocks in this active trading portfolio," the analyst said.
"We then compare this weight with the relevant equity index benchmark to form the active weight."
Here's the list of the most/least crowded trades:
Taylor Cox contributed to this article
Latest Ratings for AAPL
|Sep 2017||Morgan Stanley||Maintains||Overweight|
View More Analyst Ratings for AAPL
View the Latest Analyst Ratings
See more from Benzinga
- Investors Aren't Fully Appreciating Dynamics Of Tech Data's Relationship With Apple
- 'OK Google,' How Will Alphabet Perform In Q3?
- The Pros And Cons Of Siris Capital's Proposed Synchronoss Deal
© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.