Optimal Disclosure in Crowded Markets

Hedge funds are often not fully aware of how many competitors enter the asset market in which they invest. In this paper, we ask how investment strategies are affected by population uncertainty when investors face negative externality on asset returns. We propose a simple investment game that incorporates both strategic substitutability and population uncertainty. We have two main results. First, population uncertainty drives funds to invest/herd more in the asset with negative externality. Second, a planner who observes the population size finds it suboptimal to reveal her information to all the funds in order to mitigate the externality.