BAML: This is the most overcrowded trade

The dollar is hugely overvalued.

According to the Bank of America Merrill Lynch Global Fund Manager Survey out on Tuesday, a higher percentage of investors in February believed the dollar is overvalued than in more than a decade.

According to the results, 41% of fund managers believed that the "most crowded trade" is being long the US dollar, followed by 14% citing short government bonds and 13% long US/EU corporate bonds.

The BAML Fund Manager Survey questioned 210 investors with a combined $632 billion in AUM.

Many forecast a continuing rally in the dollar in 2017 due to higher interest rates (the Fed indicated three rate hikes this year in its December projections), increased government spending, and potential changes in trade policy.

While this may be true, investors need to "avoid groupthink" and be wary of overcrowded trades, according to former GLG Partners fund manager Raoul Pal in an interview with Business Insider.

According to Pal, avoid the herd. "Look for other sources of return so they're not so crowded as everybody else's because those are the ones where the maximum risk lies."

If the bets don't play out and there's a reversal, even a short-term one, "it can be very painful if too many people are involved in a certain trade."

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