Although performance has been improving recently and the Fed’s easing cycle is anticipated to improve prospects for the asset class, the Russell 2000 has only returned 7% so far in 2025.
One hedge fund that focuses on small-cap stocks has been outperforming the majority of them this year, despite the fact that large-cap megatech stocks have dominated the investment scene in recent years. In July, Grow Funds LLC produced an impressive monthly return of 25%. August was nearly as amazing, too. By the end of last month, the fund had risen 96% so far this year, compared to the Russell 2000’s 7% increase.
The Russell 2000 RUT index is up 9.96%, but Grow’s Small Cap long/short fund, which often uses index shorts as its preferred hedge, has returned 17% since its launch.
Given that Grow rarely makes investments in businesses with market capitalizations more than $5 or $6 billion, the FAANGs and Mag7 MAGS stock market darlings are not on their radar and have not been added to their portfolios, making the outcomes all the more astounding.
Carl Wiese, the portfolio manager, responds that multiple holdings have contributed to the outstanding performance throughout the summer rather than a single large winner. But it’s obvious that some contributed more than others.
For instance, this year has seen a quintupling of semiconductor play Aeluma (ALMU). Zeta Global Technology (ZETA), a cloud provider for AI marketing, has also made a substantial contribution. Grow maintains a relatively limited portfolio, often consisting of fewer than three dozen names, even though it screens more than a thousand stocks every day. Wiese has conducted the study: “Once you exceed twenty or thirty names in the portfolio, most of the benefits of diversification start to diminish.”
It should come as no surprise that small-cap stocks can provide substantial gains. With an average return of 11.78%, tiny caps lead the way when comparing the charts of the major asset classes—bonds, gold, small and large caps—over the past century and inflation.
Small-cap stocks have outperformed large-cap stocks, bonds, gold, and inflation during the past century.
Grow’s investment philosophy is simple and rather antiquated, so there isn’t a secret or magic technique to its success. According to Wiese, who founded the fund with its headquarters in La Jolla, California, in 2012 alongside fellow manager Michael Collins, “We are stock pickers.” Collins has five decades of experience in the small-cap market, whereas Wiese has thirty.
Finding new, early-stage businesses with above-average revenue growth, high profitability potential, and accountable management teams is the goal of the stock selecting technique. But the first criterion Wiese and his analyst Chase McIntosh use to filter equities is basically technical: they measure buying and selling pressure by examining price charts and accumulation indicators.
The methodical process of study begins after identifying intriguing concepts, and it typically entails extensive conversations with sell-side analysts and business management, particularly via which Wiese places a high value. Wiese uses Concur founder Steve Singh as an example of a firm founder he has successfully supported with an investment for thirteen years starting in 2003. For $8.3 billion, SAP purchased Concur in 2014.
Small-cap companies can be acquisition targets, have more concentrated business strategies, and typically have stronger growth prospects, he argues, even though their values can be inefficient because Wall Street does not study them closely.
These days, there is so much passive investing in small-cap equities that the active fund manager has a clear edge.
Since small caps often do better when interest rates are declining and the Fed is about to undertake what appears to be a cycle of concerted easing, Wiese is optimistic that the performance may be maintained.
Any economic boost tends to be felt more quickly on smaller balance sheets, and small-cap stocks are typically more leveraged and hence more vulnerable to changes in their borrowing costs. Wiese also notes that his industry is often less susceptible to capital outflows that may have been brought on by the White House’s new trade and economic policies because it has fewer foreign shareholders than large-cap firms.
Although Wiese is more focused on growth than prices, he stresses that small caps may still thrive in spite of bubbly markets and currently high stock market valuations. He uses the aftermath of the dotcom bubble in the early 2000s and the Nifty Fifty speculative frenzy in the 1970s as examples, pointing out that small caps outperformed after both bubbles burst.
