The team finds similar signs of crowding in value and size though the evidence is less clear-cut since these are slower-moving strategies. The data is also too noisy to conclude that crowding in those two factors has actually intensified over the years.

But overall it’s a grim picture for the famous factor model developed by academics Eugene Fama and Kenneth French, which includes value and size.

“The estimated impact costs suggest that simple Fama-French factor investing is close to saturation,” the authors say in the recent paper.

Their contention that herd behavior is causing rules-based strategies to misfire will find plenty of pushback. BlackRock Inc. -- which has facilitated the factor boom with its smart-beta exchange-traded funds -- has stressed that these quant strategies in one direction are often offset by the buying and selling behavior of other types of investors. It also said in a December note that trading costs are far from destroying returns.

Many would point to value or small-cap stocks’ widening discount to the broader market as a sign that these factors are, if anything, becoming less popular.

Besides, a crowded trade could still pay off thanks to strong underlying fundamentals, says Wes Gray, founder of Alpha Architect, an ETF provider. Factors such as momentum, low volatility and quality have delivered decent performance in recent years, he points out.

But to Bouchaud, the research confirms his firm’s long-held view that quants can rely on traditional factors no longer. Instead, they should find more innovative ways of applying old ones, or dig for new varieties altogether.

“Naive implementation of factors is not good enough anymore,” he said.

This article was provided by Bloomberg News.

First « 1 2 » Next