Under the Radar: Structural Alpha in the Small-Cap Equity Market

19 Pages Posted: 2 Sep 2015

Date Written: July 10, 2015

Abstract

As the hedge fund industry has grown over the last decade, alpha has become more elusive. This paper examines several properties of the U.S. small-cap equity market and identifies a number of structural inefficiencies that may be exploited to generate alpha.

We show that small-cap equities are covered by fewer analysts and their analyses are published less frequently, with "noisier" earnings forecasts than those published for large-cap equities. We also demonstrate that large hedge fund investors tend to gravitate to large-cap stocks. Further, despite limited attention from both the sell-side and the buy-side, we underscore that most M&A deals occur among small caps. Lastly, the majority of returns from small caps are driven by stock-specific factors rather than by industry or style-related variables. In conclusion, we believe small cap stocks offer a more fertile ground than large caps for alpha-focused investors.

Keywords: small-cap, inefficiency, alpha, hedge funds, stocks

JEL Classification: G12, G14

Suggested Citation

Ranguelova, Elena and Feeney, Jonathan and Lu, Yi, Under the Radar: Structural Alpha in the Small-Cap Equity Market (July 10, 2015). Available at SSRN: https://ssrn.com/abstract=2632655 or http://dx.doi.org/10.2139/ssrn.2632655

Elena Ranguelova (Contact Author)

Investcorp ( email )

United States

Jonathan Feeney

Investcorp ( email )

United States

Yi Lu

Investcorp ( email )

United States

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