Hedge Funds, ETFs Seen as Behind Small-Cap Boom

Small-company stocks are booming causing a growing debate in the industry that hedge funds and exchange-traded funds are playing an unbalanced role in the market, according to The Wall Street Journal. Mutual funds that invest in small-company stocks saw double-digit returns last year, even though some experts predicted the run would end. However, some investors don’t think that all the gains can be attributed to the underlying companies fairing well. They state that cash pouring in from hedge funds and the increased use of ETFs may be strong factors in the companies’ returns. Safer investments such as government bonds have not been offering high returns lately and investors are switching to riskier alternatives such as small stocks. The effect on stock prices there can be overstated, as every dollar invested in a small company represents a higher percentage of its market size, as compared with a large company. ETFs focused on small stocks have also become popular. Barclays Global Investors’ iShares Russell 2000 Index ETF has attracted more than $12.6 billion in assets since its inception in 2000. Nonetheless, some analysts do not believe that the money from hedge funds and ETFs is enough to affect stock prices. Some of the small-cap ETFs have been around long enough for the market to absorb their flows without creating any disproportionate impact, said Paul Mazzilli, director of ETF research at Morgan Stanley. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.