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Article

Practical Applications of Crowded Trades: Implications for Sector Rotation and Factor Timing

William Kinlaw, Mark Kritzman and David Turkington
Practical Applications 8 (1) DOI: https://doi.org/10.3905/pa.8.1.378
William Kinlaw
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Mark Kritzman
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David Turkington
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Practical Applications Summary

In Crowded Trades: Implications for Sector Rotation and Factor Timing, in the July 2019 edition of The Journal of Portfolio Management, authors William Kinlaw and David Turkington of State Street Associates and Mark Kritzman of Windham Capital Management discuss how investors can locate investment bubbles, determine whether these are expanding or deflating, and most profitably manage their exposure to bubbles’ run-ups and sell-offs. The authors propose two measures: (1) asset centrality to identify crowded trades (often the harbinger of bubbles) and (2) a complementary relative-value metric to distinguish between centrality during a bubble’s expansion and its deflation. Applied together, these measures can identify expansions and retractions of sector and factor market bubbles, the authors assert, to the advantage of investors wanting to trade these events.

The authors back test the effectiveness of their measures by studying how they behaved during the tech and financial bubbles, among others. The authors conclude that, over the past 30 years, investors could have outperformed several equity markets by applying a sector-rotation strategy jointly incorporating these two measures, and also could have outperformed selected markets by using these measures to time exposure to such factors as size and volatility.

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Practical Applications
Vol. 8, Issue 1
31 Jul 2020
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Practical Applications of Crowded Trades: Implications for Sector Rotation and Factor Timing
William Kinlaw, Mark Kritzman, David Turkington
Practical Applications Jul 2020, 8 (1) DOI: 10.3905/pa.8.1.378

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Practical Applications of Crowded Trades: Implications for Sector Rotation and Factor Timing
William Kinlaw, Mark Kritzman, David Turkington
Practical Applications Jul 2020, 8 (1) DOI: 10.3905/pa.8.1.378
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    • Practical Applications Summary
    • Overview
    • Practical Applications
    • Key Definitions
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    • ASSET CENTRALITY
    • RELATIVE VALUE
    • USE IN SECTOR AND FACTOR ROTATION
    • William Kinlaw
    • Mark Kritzman
    • David Turkington
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