According to Morningstar, Q2 inflows into US smallcap equity hedge funds were $757 million. This was a 523.7% increase from Q1 and may help to explain why small (VB) and micro (FDM) caps have outperformed the S&P 500 (SPY) so far this year.
A Pensions & Investments article entitled “Managers Hungry for Cash Infusion” (Aug 18th) cites that many managers are re-opening their funds to new investors for the first time in years. While most hedge fund categories are experiencing negative inflows, US smallcap is in demand and seems to be viewed as an opportunity by fund-of-funds, pensions, and endowments. The implication is that US smallcap hedge funds may have begun or may begin to put this fresh capital to work.
While I am not an advocate of market timing, I am an advocate of diverse institutional style asset allocation. Investors who are appropriately allocated to smallcap in stocks, ETFs like (VB) or mutual funds should consider this most recent move by institutions as a positive one.
Disclosure: The author’s firm has positions in SPY, FDM, VBR.