Transaction costs and crowding

We use industry data to determine whether crowding of the investment space is caused by portfolio construction processes typical to the investment community. In particular, this paper examines the extent that transaction cost models cause crowding of the investment space, even when the investment models are completely unrelated to one another. We find that as transaction costs become more significant in the portfolio creation process as portfolios increase in size from $500 million to $5 billion, crowding actually declines for long-only portfolios and mainly declines, but sometimes increases for market neutral portfolios. This research sheds more light on how crowding develops through actions by players within the financial system.