Crowding refers to security (significant) ownership by some class of investors.

Zooming on stocks, ownership of a stock by similar funds / asset manager can be a predictor of short term performance due to market impact from large owners who display herding behavior

Say, a stock is an income fund darling due to its higher than average and stable yield. A negative earning announcement which may be small in size but (potentially) interpreted  as having a long term risk to the dividend level might prompt income investors to sell / trim their position in this stock.

Given income investors might think other income investor might think the same, they will probably sell some in advance – this is the very well known self fulfilling prophecy phenomenon

Such herding behavior might lead to extreme short term returns from mildly negative news flow on an individual security.

Quantifying crowding is a way to warn portfolio manager which security is exposed to such a potential short term move and act accordingly