Fund managers love these small- and mid-cap stocks, and for good reason

In a year that has had little good news for hedge funds comes one positive tidbit: Their holdings of stocks outside the large-cap space have done quite well.

Hedge funds' most-owned stocks in the Russell 2500 index of small- and mid-cap stocks have returned 7.3 percent in the third quarter, better than the index's 5.3 percent gain, according to data from Citigroup analyst Scott Chronert. That's also well ahead of the 3.4 percent return for the stocks in the index that are most loved by mutual fund managers.

For the year, hedge funds have limped to a 3 percent gain, according to totals through July from industry tracker HFR. Mutual funds returned 4.8 percent through July, according to Bank of America Merrill Lynch.

Overall, the most-owned names in the small- and mid-cap space have performed either in line or a bit better than their indexes. Interestingly, in the large-cap space one of the best trades of the year has been selling the most-owned stocks and buying the least owned.

On a sector basis in the small and mids, hedge funds have been snapping up energy stocks and ditching consumer discretionary. Among the mutual funds, one noticeable trend in the space has been a move away from health care.

In the Russell 2500, the average return of the 20 most-owned stocks by hedge and mutual funds is 6 percent for the third quarter; the median return is 8.1 percent, and index is up 5.8 percent.

The top 10 most-owned stocks on the Russell 2500:

QTD return % (through Monday)
Envision Healthcare EVHC -16.1
Newfield Exploration NFX 5
Take-Two Interactive TTWO 8.1
Gulfport Energy GPOR -14.5
Hologic HOLX 10.8
Alaska Air ALK 15.1
Southwestern Energy SWN 9.1
Foot Locker FL 24.8
Post Holdings POST 2.7
Interpublic Group IPG 0.3
Source: FactSet, Russell Citi Research

On the Russell 2000 small-cap index, the average quarter-to-date return for the 20 most-loved stocks is 7.8 percent, while the median is 7.4 percent, matching the index's overall return.

The 10 most-loved stocks on the index:

QTD Return % (through Monday)
Take-Two TTWO 8.1
MGIC Investment MTG 32.3
American Eagle AEO 19.5
Big Lots BIG 6.7
Penn National PENN 6.3
Dynegy DYN -29.6
Nexstar NXST 12.5
Office Depot ODP 6.3
Jack in the Box JACK 14.4
Integrated Device IDTI 1.3
Source: FactSet, Russell Citi Research