The small‑cap tech sector — broadly companies often defined in the U.S. as those with market capitalizations under roughly $200 million to $2 billion — currently occupies a precarious yet potentially rewarding position. On one hand, small caps in general have been under pressure: the classic “small‑cap premium” (smaller firms outperforming larger ones) has faded, with large‐cap firms generating an annualized return of about 10.6 % versus small‐cap’s 8.7 % according to one noted analysis by Monetagroup through mid‑2025. A key reason: many small companies carry higher floating‑rate debt, less operational flexibility and lower profitability — all penalized by higher interest‑rates and economic uncertainty.

Zoom into tech small caps and you find mixed signals. In the U.S., the S&P SmallCap 600 Capped Information Technology index tracks small‑cap tech exposures and exists, but sector weightings tell a story: tech exposure among small caps remains modest (mid‑teens) versus large‑caps where tech has surged to ~30 %. That suggests many small‑cap tech names are either still private, have grown out of “small cap,” or simply lack the scale to dominate the public markets.

Institutional interest in this niche appears muted compared to mega‑cap tech. Lower analyst coverage, higher volatility, and the liquidity constraints of smaller stocks deter large institutions. That said, valuations for small caps overall are becoming compelling: one note puts their relative valuation at the 5th percentile compared to large caps — suggesting institutions may be watching. Then again, “watching” isn’t the same as aggressively allocating.

Looking ahead: if interest‑rates fall and economic growth resumes, small‑cap tech could benefit disproportionately — lower financing costs, more growth runway, less global revenue exposure (many small caps are more U.S.‑domestic) and upside from niche technology disruption. But the flipside: macro risk remains, and until small‑cap tech demonstrates consistent earnings growth, institutions will likely allocate cautiously. In short: the sector’s set up for opportunity, but it’s not yet “Go” for broad institutional buying.

That said, some of the small-cap tech stocks definitely hold high institutional interest. Below is the list of small-cap tech stocks that hedge funds were piling into in Q2.

Our Methodology

For our list, we picked small-cap tech stocks that had the highest number of hedge funds holding stake in them as of Q2, 2025. We omitted any stocks whose hedge fund sentiment had decreased quarter-over-quarter. We’ve also mentioned each of the stock’s percentage returns between the period of June 30 to October 27 to reflect whether these hedge funds were right or wrong about their bet. We’ve done the ranking on the basis of the number of hedge funds holding stake in these stocks. For stocks with the same number of hedge fund holders, we’ve done the tiebreaking based on their percentage change since Q2.

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 427.7% since May 2014, beating its benchmark by 264 percentage points (see more details here).

11. Telos Corporation (NASDAQ:TLS)

Number of Hedge Fund Holders: 15

Percentage Change Since Q2: 130%

Market Cap: $528.5 Million

Telos Corporation (NASDAQ:TLS) was one of the small-cap tech stocks hedge funds were buying in Q2

On October 13, 2025, Telos Corporation announced that a U.S. federal agency will deploy its AI‑driven governance, risk and compliance platform, Xacta.ai, enterprise‑wide, marking the first full‑scale federal rollout of the solution.

The agency, already a Telos customer, will integrate the software across its operations to leverage intelligent workflows, real‑time insights, and automated compliance mapping. In pilot testing, Telos said Xacta.ai shortened compliance tasks from months to days and generated implementation statements in minutes rather than hours.

The system is designed to automate risk assessments, streamline authorization processes, and enhance security compliance at scale. The company described the deployment as part of its effort to modernize federal compliance operations through artificial intelligence and automated workflows.

Telos Corporation (NASDAQ:TLS) is headquartered in Ashburn, Virginia, and provides cybersecurity, cloud security and enterprise identity/defense solutions to government and regulated industries around the world.

10. Perion Network Ltd. (NASDAQ:PERI)

Number of Hedge Fund Holders: 17

Percentage Change Since Q2: -4.6%

Market Cap: $430 Million

Perion Network Ltd. (NASDAQ:PERI) is one of the small-cap tech stocks hedge funds were buying in Q2. On October 13, Jason Kreyer from Craig-Hallum initiated coverage of Perion Network Ltd. (NASDAQ:PERI) with a Buy rating and a $14 price target. The analyst’s price target points to a nearly 50% upside from current levels.

In other news, on September 25, Perion announced a strategic partnership with Albertsons Media Collective, the retail media arm of grocery giant Albertsons Companies. The collaboration gives Perion access to Albertsons’ first-party purchase data across a network of over 2,200 stores and 100 million+ shoppers. Through this integration, advertisers using Perion’s platform can now target retail audiences more precisely across high-impact display formats and digital out-of-home (DOOH) environments.

The move signals Perion’s growing ambition in the fast-evolving retail media space, a rare area of AdTech still posting meaningful growth, driven by brands seeking alternatives to walled gardens. While financial terms weren’t disclosed, the partnership is expected to enhance Perion’s value proposition in omnichannel advertising and help it differentiate from more commoditized programmatic platforms.

Perion Network Ltd. (NASDAQ:PERI) is a Tel Aviv- and New York-based technology company that provides advertising solutions across search, social, display, and DOOH channels. Its clients include brands, agencies, and publishers aiming to optimize engagement and ROI across digital campaigns.