New York – The push for “alpha,” or market-beating returns, is prompting hedge funds to dig deeper into smaller-capitalization stocks, raising concerns over “liquidity risk” in a potential market downturn.
With fewer potential buyers, such stocks may become traps for hedge funds looking to sell in falling markets. And investors who have holdings in numerous hedge funds may face additional exposure, since many small-cap stocks have multiple hedge fund holders.
“If the stock market plummets and they want to get out, they could get hosed,” said Adam Sussman, senior analyst at hedge fund research firm Tabb Group, referring to hedge funds that have significant allocations to small-cap stocks.
