In this article, we will take a look at the 12 Best NASDAQ Penny Stocks to Buy According to Hedge Funds.

On September 12, Franklin Templeton released its research on active U.S. small-cap management. The research found that active small-cap managers actually have a strong relative long-term performance record. The report highlighted the historical trend between active small-cap managers outperforming the Russell 2000 in periods when value stocks lead, while trailing the small-cap index when growth stocks lead.

READ ALSO: 10 Most Promising Technology Stocks to Invest In and 11 Low Price High Volume Stocks to Buy According to Analysts.

The research compared Morningstar’s Small Blend category average to the Russell 2000 index over monthly rolling 5-year periods. It found out that the Small Blend average beat the index 58% of the time. Even though the Small Blend average surpassed the Russell 2000 58% of the time during 5-year periods, it outperformed in 82% of value-led periods. However, it outperformed only 15% of growth-led periods. 65% of the periods were value-led, which contributed to greater relative success for active management. The research suggests that if this pattern persists, it has implications for the current market, particularly if an extended period of outperformance for value stocks begins.

Other key stats from the research included, if the annualized 5-year return for the Russell 2000 was 5% or lower, the Russell 2000 value outperformed in only 48% of the periods; however, they averaged higher returns compared to the Russell 2000 growth. When compared to annualized 5-year returns in the range of 5-10%, value stocks exceeded growth stocks 70% of the time. The research concludes that this is relevant now because Royce’s expectation for small-cap returns over the next five years is in the 5-10% range.

With these market trends in mind, let’s turn to the 12 Best NASDAQ Penny Stocks to Buy According to Hedge Funds.

Our Methodology

To compile the list of the 12 best NASDAQ penny stocks to buy according to hedge funds, we shortlisted the largest companies trading under $5 on the NASDAQ exchange from the Finviz screener. We then ranked these NASDAQ penny stocks in ascending order of the number of hedge fund holders. The data for hedge funds is taken from Insider Monkey’s Hedge Fund database, updated as of Q2 2025.

Note: The data was recorded on September 12.

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).

12 Best NASDAQ Penny Stocks to Buy According to Hedge Funds

12. Prospect Capital Corporation (NASDAQ:PSEC)

Price as of September 12: $2.79

Number of Hedge Fund Holders: 11

Prospect Capital Corporation (NASDAQ:PSEC) is one of the best NASDAQ penny stocks to buy according to hedge funds. On September 8, Prospect Capital Corporation (NASDAQ:PSEC) and an affiliate completed an $18 million investment in The Ridge.

In collaboration with Thesis Capital Partners, Prospect Capital has provided a first lien senior secured term loan and an equity investment to The Ridge, a physician-led addiction treatment facility that provides personalized care in a luxurious residential setting. The company offers various services, from detoxification to outpatient care, integrating evidence-based clinical treatments with holistic therapies.

“Prospect is pleased to provide growth capital to The Ridge to work in collaboration with Thesis Capital Partners and The Ridge management team. The Ridge is a differentiated treatment facility focused on professionals in the high-end substance abuse market. We look forward to supporting the Company’s continued growth,” said David Moszer, Managing Director at Prospect.

On September 9, Wells Fargo analyst Finian O’Shea reiterated a Sell rating on Prospect Capital Corporation (NASDAQ:PSEC), keeping the price target at $2.5. The company’s net debt to total assets ratio of 30.4% indicates a relatively high level of leverage. Prospect’s real estate investment, which yields 4.5%, is being strategically exited, which is impacting income from this segment. Despite these challenges, Prospect continues to diversify its funding strategy with $12.2 billion of commitments from 48 banks as of Q2 FY2025, reflecting strong support from the lender community.

Prospect Capital Corporation (NASDAQ:PSEC) is a business development company that focuses on lending to and investing in private businesses. The company’s debt and equity investments allow it to generate current income and achieve long-term capital appreciation.

11. Tilray Brands, Inc. (NASDAQ:TLRY)

Price as of September 12: $1.12

Number of Hedge Fund Holders: 12

Tilray Brands, Inc. (NASDAQ:TLRY) is one of the best NASDAQ penny stocks to buy according to hedge funds. On September 4, Tilray Brands, Inc.’s (NASDAQ:TLRY) award-winning brand Breckenridge Distillery and its partner, the Denver Broncos, entered into their fifth year of partnership with a new lineup of spirits.

The partnership between Breckenridge Distillery and the Denver Broncos celebrates the growing business between the two firms. The new bold lineup of limited-edition spirits celebrates the game-day pride.

“This year’s collection is a true celebration of Colorado, of championship legacy, and of Broncos Country. From the rare, harvested honey in our Broncos Honey Whiskey to the nostalgia-packed Vodka Creamsicle Seltzer, we’ve created something special for every kind of fan,” said Bryan Nolt, founder of Breckenridge Distillery.

The limited-edition brings the smooth, golden finish of the new Breckenridge Broncos Honey Whiskey, the nostalgic Broncos Creamsicle Vodka Seltzer, a special edition camo-labeled Breckenridge Bourbon, and a Broncos Single Barrel Championship Reserve bottle.

On August 25, Jefferies analyst Kaumil Gajrawala increased the price target on Tilray Brands, Inc. (NASDAQ:TLRY) from $1.50 to $2, keeping its Buy rating. Gajrawala remains positive about TLRY following the rescheduling of cannabis from Schedule I to Schedule II in the U.S. This development serves as a major government policy change that could favor Tilray.

Tilray Brands, Inc. (NASDAQ:TLRY) is a lifestyle consumer products company that engages in the research, cultivation, processing, and distribution of medical cannabis products. The company operates via four segments: Beverage, Cannabis, Distribution, and Wellness.