Crowding shows up in measurable ways: the valuation spread between the long and short legs compresses, correlation among the factor's holdings rises, short interest and borrow costs in the short leg climb, and the factor's own volatility increases.
The danger is not slow underperformance but fast unwinds. When leveraged holders of the same positions are forced to reduce at once, the factor can lose several years of premium in days. The August 2007 quant liquidation is the canonical case, where widely held equity market-neutral books fell sharply over three days and largely recovered within the week.
Diversifying across factors helps less than it appears, because crowding itself is the common exposure. Sizing for the unwind rather than the average case is the practical response. See statistical-arbitrage.
Related: factor-investing, statistical-arbitrage, low-volatility-factor, momentum-factor, tail-risk, correlation