EM Small-Cap Funds: A Niche Alpha Story?
Evaluating active managers in less crowded markets
August 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- 96% of the AUM in EM funds is allocated to global funds
- Intuitively, there should be more alpha opportunities in EM small-caps
- Managers do not seem to take enough risks to exploit these
INTRODUCTION
Intuitively, less crowded markets should offer more business opportunities, so in investing, it should be easier to generate alpha in emerging markets than in developed ones. Apple (APPL) is covered by dozens of research analysts scrutinizing the company, its competitors, its clients, its regulators, and the rest of its ecosystem in real time. In contrast, plenty of companies in other markets receive very little attention. In Singapore, the government has started paying brokers S$6,000 each time they publish a report on a Singapore-listed stock.
Yet despite this intuition, the data shows that generating alpha in emerging markets (“EM”) is remarkably difficult, as our previous research has shown. EM mutual fund managers have been unable to beat their benchmarks (read Less Efficient Markets = Higher Alpha?). Multi-factor investing hasn’t been value-creating there either, despite supportive academic research (read Multi-Factor Investing in Emerging Markets). And even hedge funds struggle to exploit these seemingly less efficient markets (read EM Hedge Funds: Extracting Alpha from Inefficient Markets?).
Perhaps the answer is to go to even less crowded corners of the market. In this research article, we explore the case for active management in small caps within emerging markets.
EM FUNDS OVERVIEW
In the U.S. and Europe, more than 5,000 emerging markets actively and passively managed mutual funds and ETFs manage more than $2.8 trillion in assets. However, a distribution analysis of assets shows that 96% is allocated to global emerging markets funds, while regional, small-cap, and other strategies each received less than 1% of
