Buying stocks that hedge funds favor could cause problems for individual investors for the risks of high valuation and elevated volatility, 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.
Car rental agency Avis Budget Group was the most crowded stock among hedge funds, with more than half its float owned by professional traders. Aerospace and defense company Loar Holdings and real estate development and management firm Howard Hughes were also on the list of crowded trades. Janus Henderson , The New York Times , Planet Fitness and Wayfair were popular names among hedge funds last quarter.
The strategists cautioned that crowdedness is relative and just a starting point to generate ideas, adding that investors should do additional research when making a decision. — CNBC's Michael Bloom contributed reporting..