It’s a Small Cap Life

摘要： The so-called small-cap effect, whereby small companies tend to outperform large ones over time is well documented. The basic theory states that there is a premium to be achieved by investing in smaller companies. However, the challenge arises from the fact that the aforementioned small cap assets are usually a lot less liquid and are also a lot more volatile. In turn, transaction costs are higher and there is a greater risk of information leakage, impact on the underlying price as positions are slowly built up by active money managers. Another key factor to consider when trying to harness the effect is re-correlation risk. ......

The so-called small-cap effect, whereby small companies tend to outperform large ones over time is well documented. The basic theory states that there is a premium to be achieved by investing in smaller companies. However, the challenge arises from the fact that the aforementioned small cap assets are usually a lot less liquid and are also a lot more volatile. In turn, transaction costs are higher and there is a greater risk of information leakage, impact on the underlying price as positions are slowly built up by active money managers. Another key factor to consider when trying to harness the effect is re-correlation risk. In other words, small caps will tend to outperform large caps, but when markets fall, small caps underperform large caps and depending on the severity of the overall market weakness, the risk of re-correlation to the broader market increases accordingly – i.e. ability to outperform large cap peers is reduced substantially. There are other biases to consider, but the basic outline of the theory is as above.

While the above notions are commonly accepted in traditional markets, following the dramatic collapse of the Initial Coin Offering (ICO) market, investing in smaller cap assets has become even more of an opportunistic playground, as opposed to a means to outperform the core. For most part, the market is overly fixated on Bitcoin and its slowly dwindling supply, while market commentators are often seen commentating on its deflationary appeal and a hedge against inflation. Ethereum has also gained more interest from the crowd this year and that has been for several reasons. For one, the amount of Tether issued on Ethereum has grown exponentially this year and two, developers at Ethereum have made great strides in their efforts to accelerate the transition away from Proof of Work (PoW) to Proof of Stake (PoS).

What is more interesting is that heading into 2020, expectations were that block reward halving by Bitcoin that took place earlier in the year would be the dominant story but instead, it appears that this has been overshadowed by the fast-developing narrative of alt coins outperforming. On that note, when looking at year-to-date performance by the MVIS 100 small cap index relative to the large cap counterpart, small cap index has outperformed its large cap peer by over 10%. Specifically, small cap index is up 42%, while large cap is up 28%.

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