Concentration of Institutional Capital and How to Manage It

When large long-term investors direct capital to the same themes through the same few channels, concentration rises. Concentration is a risk, and it can be managed.

This note argues that long-term investors should measure concentration and manage it as a risk of its own. There are three reasons.

First, concentration is observable. The Bank of England Financial Policy Committee's record, published on 7 July 2026, notes that a small group of AI-related companies has increased concentration in some global indices (Bank of England, 2026). The International Monetary Fund's (IMF) October 2026 Global Financial Stability Report identifies crowded trades, concentrated exposures, leverage, and circular financing as factors that could amplify a correction in AI-related assets (International Monetary Fund, 2026).

Second, concentration does not by itself establish that investors are imitating one another. It describes the result: large amounts of capital pursuing the same theme through a limited number of channels. Lakonishok, Shleifer and Vishny (1992) studied 769 U.S. pension funds and found little evidence of imitation, except in small-cap stocks. Sias (2004) found that institutional purchases followed other institutions' earlier purchases more closely than past returns, with information inferred from other investors' decisions offering the strongest explanation. Investment scale, pooled co-investments, and long investment horizons can also lead to similar decisions for sound reasons. Concentration risk matters regardless of how those decisions are reached.

Third, financing structures affect the level of risk. Working Paper 1367 from the Bank for International Settlements (BIS), published on 14 July 2026, models how competition to invest in a single theme can push investment beyond an economically efficient level, with debt and circular financing adding to the risk (Rungcharoenkitkul, 2026). The paper presents a theoretical model rather than an empirical measurement. It highlights the importance of assessing how an investment is financed alongside the theme it targets.

Long-term investors can take three practical steps: map overlapping exposures through funds, co-investments, and indices; consider allocations to businesses outside crowded themes; and assess each investment's financing structure, including its debt, alongside the investment theme.

This approach can help investors understand their portfolios and maintain a clear investment rationale through a market correction. It can also direct patient capital toward businesses outside crowded themes and support more stable markets.

At I3H Investment, we invest in and develop enterprises for the long term. We see value in directing long-term capital across a broad range of businesses in the real economy.

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