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Ominous signs are multiplying for the hottest quantitative strategy since the financial crisis as market leaders wobble.

Dubbed momentum investing -- betting on stocks that have gained the most over the past year -- everyone from passive investors to hedge funds have flocked to the trade in recent years, as one of the last ways to beat benchmarks amid relentless rallies.

But as technology stocks struggled to reassert their market-leadership role this week on the heels of Facebook Inc.'s data controversy, strategists are issuing a warning on the crowded trade.

A new class of investors may have become oblivious to the risks thanks to the boom in tech shares, which have posted the strongest returns of any industry over the past decade and turbocharged momentum strategies in the process.

Over the past year, chipmakers Micron Technology Inc. and Nvidia Corp. alone accounted for more than a tenth of gains in the Bloomberg pure U.S. momentum index.

While contagion from Facebook's woes was largely limited, allowing the strategy to trade in the green, Jason Williams, a portfolio manager at Lazard Asset Management Ltd., is worried. Too many expensive stocks -- many of which are acutely sensitive to overall market sentiment -- have slipped into the momentum basket, increasing the likelihood of a large drawdown once market leadership finally rotates, he said.

"Given the amount of assets that are in strategies that you can sell at the drop of a hat, it can easily create a repeat of what we've just seen in January and February," Mr. Williams said in an interview. "I could imagine a situation where momentum has a few more down days like we saw a couple of days ago and it actually gets worse, and it starts to turn into more of a rotation."

It's difficult to put a number on the amount of money focused on the trade but the boom in exchange-trade funds illustrates the trend. Though just a small fraction of the universe, U.S. ETF assets tied to momentum have doubled in less than a year to more than $12-billion, data compiled by Bloomberg show.

Add the birth of smart-beta ETFs along with cheap data, and a large number of investors have adopted the strategy with ease during the nine-year bull market as momentum posted the best returns across the quantitative kingdom.

That all signals a looming risk. Whether it's fickle sentiment, complacency or unrealistic expectations, allocations may not prove sticky during a prolonged bout of market stress, said Williams. It's especially dangerous since momentum tends to crash harder than most equity groups.

Appetite may be tested sooner rather than later, according to analysis from UBS Group AG. Immediately after a jump in choppy market conditions, momentum tends to outperform, the bank said. Then, about 45 days after a VIX shock, cheap stocks typically catch up and momentum struggles. True to form, momentum delivered market-beating returns following the February VIX spike. As such, volatility patterns of yesteryear suggest the strategy may be near a turning point, equity analysts warned in a Wednesday note.

Whether a new regime is brought on by shifting technology demand or economic concerns feeding appetite for defensive shares, the result is the same: momentum would initially plunge amid a leadership change. Still, the model would eventually readjust to the latest trading pattern, remaining a viable investing style in the process -- likely backed by large pools of money.

For now, that may be an academic point. Risks are rising and there are few alternatives. Higher interest rates hurt bond proxies, bad-balance sheets dog cheap stocks and lofty valuations haunt companies with strong earnings growth, pushing investors to the momentum trade by default, said Andrew Lapthorne, global head of quantitative strategy at Societe Generale AG.

These dynamics create "extreme markets similar to 1999, where investors buy tech because their downside risk is unknown and as an aversion to problems elsewhere," he said in an interview. "While aggregate valuations are not as bad, individual valuations are, and of course, the tech sector is huge now as a percent of GDP. Tech inevitably will be more cyclical than investors assume."

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