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Morgan Stanley cautions against owning overcrowded stocks for risk of high valuation, volatility

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The firm noted that 'crowdedness' could mark a starting point for idea generation, and additional research is needed before making an investment decision.

Owning overcrowded stocks could increase volatility and lead to muted portfolio gains, according to Morgan Stanley. The Wall Street firm studied the 70 largest hedge funds based on assets under management, and identified Russell 1000 stocks with the highest percentage of public float owned by them, based on the most recent 13F filings.

"Crowded trades come with the risk of overvaluation and increased volatility as it may be more difficult to attract the marginal investor, while avoiding overcrowded stocks can provide investors with an opportunity to capture unrecognized value when paired with strong fundamentals," Morgan Stanley strategists said in a note to clients.

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