Three small-cap stocks hedge funds love

July 21, 2013: 1:40 PM ET
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NEW YORK (CNNMoney)

Hedge funds have built a reputation of reaping outsized returns from financial markets.

It's no wonder, then, that people want to know where they are putting their money. A recent report from NerdWallet Investing, an online broker research tool, came out with a list of small-cap stocks that are seeing the biggest inflows of hedge fund dollars so far this year.

NerdWallet analyzed regulatory filings from 10 of the largest hedge funds, including Omega Advisors and Bridgewater Associates. The report focused on relatively smaller stocks, with a market value of under $2 billion.

Related: Stock market look ahead

Maxime Rieman, senior financial markets analyst at NerdWallet, teased out a handful of the best performing stocks in the list. She said these stocks could see significant upside, given their small size.

1.Radian Group (RDN): Rieman said Radian Group, which offers mortgage insurance and other financial services, was one of the most popular small-cap investment in 2013. More than 6% of the company's stock was purchased by hedge fund managers this year. The stock is up 11.6% so far this year, at $13.20.

She said that's because of the booming housing market.

"As more people are looking to buy homes, more people are looking to buy this stock," Rieman said.

Related: SEC charges hedge fund mogul Steve Cohen

2. Caesars Entertainment (CZR): About 14% of gaming and resort company Caesars Entertainment is owned by top hedge funds, according to Rieman. Recently, the casino operator said it plans to spin off a new company that will scout for web gaming opportunities and offer its shareholders $1.2 billion in stock in the new venture. The stock, at $16, is up 131% since the beginning of this year.

"It's clear that hedge funds see Caesars as a strong investment and think it will perform strongly," she said.

3. Yelp (YELP): Hedge funds wagered big on tech companies this year, and Yelp benefited from that. Top hedge funds purchased 1.2% of the restaurant review site this year. Yelp has risen 123% this year to $42.13.

Rieman said that funds viewed the company as undervalued and were betting the stock has more to go.

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