In this article, we will look at the 15 Small Cap Financial Stocks Hedge Funds Are Buying.
How to Navigate Adding Financials To Your Portfolio Amidst Tariff Uncertainty?
Much like other sectors of the economy, the financial and banking sector is likely to take a hit from the tariff uncertainty and recession fears. On April 8th, Reuters reported that the bank earnings season will likely shift from profit-making banks to losses. Mike Mayo, who is an analyst at Wells Fargo noted that the bank’s earning season will unveil the largest effect of tariffs in the coming quarters because banks will have to set aside higher reserves for loan losses due to recession fears. Moreover, Stephen Biggar, director of financial institutions at Argus Research, noted that banks are a direct reflection of the economy, therefore as the market slows down, this sector could be the one to take the hardest hits.
To talk about the impact of tariffs on the banking sector Suryansh Sharma, senior equity analyst at Morningstar joined Yahoo Finance for an interview on April 10. He noted that the tariffs were substantially aggressive compared to what the market expected. This aggressiveness was in terms of the breadth of countries and products these tariffs targeted. Although the policy is on pause for 90 days, however, the uncertainty is far from over. Sharma believes that if these tariffs continue to stay in effect, they will be harmful to the US economy. This is important for the banking sector as the sector is tied closely to the macroeconomic performance of the United States. Therefore if the economy is not doing well, the banking and financial sector will not perform well.
Sharma further elaborated on the impact of tariffs. He highlighted that if the tariffs stay in place, the macroeconomic conditions are likely to get worse, which can lead the economy towards a recession, meaning that the Fed will cut rates faster than expected. While many sectors benefit from lower interest rates, the banking sector does not. Lower interest rates mean contracting net interest income for asset management and banking stocks. Moreover, given the high levels of uncertainty, loan growth is also anticipated to head downwards, thereby impacting the overall Merger and Acquisition activity. Sharma highlighted that the market anticipated that the Trump administration would result in a lot of M&A activity leading to a banking sector boom, however, the current situation points towards a banking sector bust.
Lastly, the analyst highlighted that Morningstar believes that the banking sector is still undervalued compared to other sectors, however, very slightly undervalued. Therefore, he suggests investors be very selective in choosing the banks they want to invest in. He likes financial stocks that have strong fee-generating capabilities and are comparatively more undervalued than their fair value.
With that let’s take a look at the 15 small-cap financial stocks hedge funds are buying.
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Our Methodology
To compile the list of 15 small-cap financial stocks hedge funds are buying, we used the Finviz Stock Screener and Insider Monkey’s Q4 2024 hedge funds database. Using the screener we aggregated a list of financial services stocks that are trading at a market cap of at least $10 billion. For the purpose of this article, we are defining small-cap financial services stocks as those that trade between a market cap of $10 billion and $20 billion. Next, after cross-checking the market capitalization from Yahoo Finance, we ranked the stocks in ascending order of the number of hedge fund holders. In cases where two or more stocks were held by an equal number of hedge funds, we used the market cap as a tiebreaker. Please note that the data was collected on April 18, 2025.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
15 Small Cap Financial Stocks Hedge Funds Are Buying
15. Houlihan Lokey, Inc. (NYSE:HLI)
Market Capitalization: $10.752 Billion
Number of Hedge Fund Holders: 28
Houlihan Lokey, Inc. (NYSE:HLI) is an international investment bank that specializes in providing advisory services through three main segments. Its main segments are Corporate Finance, Financial Restructuring, and Financial and Valuation Advisory. The company not only serves corporations but also helps institutions, governments, and sponsors around the globe.
During the fiscal third quarter of 2025, Houlihan Lokey, Inc. (NYSE:HLI) delivered robust financial performance across all its business segments. The Corporate Finance segment closed 170 transactions, up from 117 last year. This took the segment revenue to $422 million, contributing 66% to the total revenue which grew 24% year-over-year to $634 million. Moreover, the Financial and Valuation Advisory segment also continued to benefit from the improved Merger and Acquisition market, along with the Financial Restructuring which posted modest growth as well. Management noted while the average transaction fees declined in some segments the overall revenue mix helped take the profitability and liquidity higher. Houlihan Lokey, Inc. (NYSE:HLI) is one of the small-cap financial stocks hedge funds are buying.
14. The Carlyle Group Inc. (NASDAQ:CG)
Market Capitalization: $12.946 Billion
Number of Hedge Fund Holders: 32
The Carlyle Group Inc. (NASDAQ:CG) is another international investment management company that specializes in private equity, alternative assets management, and managed financial services. It operates through three main segments including Global Private Equity, Global Equity, and Global Investment Solutions.
On April 10, Barclays analyst Benjamin Budish maintained a Buy rating on the stocks with a price target of $43. Ariel Fund mentioned The Carlyle Group Inc. (NASDAQ:CG) in its Q4 2024 investor letter stating that the company traded higher during the fourth quarter on the election news which was viewed as a positive catalyst for the industry. Moreover, the fund also believes that the financial company is trading at a healthy discount to its sector.
In fiscal 2024, The Carlyle Group Inc. (NASDAQ:CG) delivered record results with fee-related earnings growing around 30% year-over-year to reach $1.1 billion. Moreover, the total assets under management also grew 4% during the same time to reach $441 billion. The growth was mainly driven by the Global Credits segment, which remained the fastest growing for the company as revenue grew 22% year-over-year and assets under management reached $190 billion. It is one of the small-cap financial stocks that hedge funds are buying.
Ariel Fund stated the following regarding The Carlyle Group Inc. (NASDAQ:CG) in its Q4 2024 investor letter:
“Additionally, alternative asset manager, The Carlyle Group Inc. (NASDAQ:CG), traded higher over the quarter with the U.S. election widely viewed as a positive catalyst across the industry. Investors expect the incoming administration to emphasize deregulation and exhibit a greater openness to business combinations compared to the prior regime. Hence, management’s positive commentary around the expectation for increased capital market activity, fee-related earnings growth, private equity fund appreciation as well as returning capital to shareholders via buybacks sent shares higher. At current levels, we believe CG trades at a healthy discount to our private market value estimate.”
