Journal of Investment Strategies

Under the radar: structural alpha in the small-cap equity market

Elena Ranguelova, Jonathan Feeney and Yi Lu

  • As the hedge fund industry has grown, alpha has become more elusive
  • Small-cap equities are covered by fewer analysts and get noisier earnings forecasts
  • Most M&A deals occur among small caps
  • Small cap returns are driven by stock-specific factors and less by industry or style


As the hedge fund industry has grown over the last decade, alpha has become more elusive. This paper examines several properties of the US 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 that 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 either the sell side or the buy side, we confirm that most mergers and acquisitions 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 more fertile ground than large caps for alpha-focused investors.

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