Small caps retake the lead

Wed Nov 1, 2006

Small caps continue to outperform, luring in more players - or are they just pumping up the market?

Small-cap strategies, which have become a mainstream hedge fund play, have been outperforming their large-cap cousins for six years now. And while they had a brief setback during May, June and July, the strategy is back on track. A composite of small-cap hedge funds compiled by Absolute Return was up 1.24% in September, for a year-to-date return of 8.45%. Hedge funds big and small are continuing to pour money into the sector.

Managers like smaller names because of their volatility, undercoverage and easily exploitable inefficiencies - which makes them good activist plays, turnaround candidates or shorts. A recent Goldman Sachs survey found that roughly 46% of hedge fund equity assets were invested in stocks with up to a $5 billion market cap at the end of the second quarter, up from...


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