As the rally continues, it’s wise to avoid overcrowded trades among hedge funds as herd mentality often leads to trouble in the stock market, according to Morgan Stanley. The Wall Street firm looked at the largest 70 hedge funds based on assets under management, and identified Russell 1000 stocks with the highest percentage of public float owned, 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. Investors in overcrowded trades could run the risk of getting caught in a losing bet when hedge funds, especially systematic traders, form a herd-like stampede to exit the same trades. Morgan Stanley found that hedge funds were most overweight in the consumer discretionary, industrials, and health-care sectors last quarter. The list of most crowded shares didn’t contain any of the “Magnificent 7” megacap names. Even though they have been extremely popular, these stocks tend to have outsized share counts that make hedge funds’ ownership less significant. Avis Budget Group was the most over-owned stock by hedge funds at the end of 2023 with half of its outstanding float shares owned by the cohort, according to Morgan Stanley. Professional traders also loved real estate name Howard Hughes and health-care company Incyte . Janus Henderson , Wendy’s , Liberty Media , New York Times and Planet Fitness were also on the list. — CNBC’s Michael Bloom contributed reporting.