BOSTON (Reuters) - Honest Capital LLC launched last year amid one of the most chaotic times in financial history, but its 88.4% returns far outpaced hedge fund peers and broad market indexes by focusing on smaller, less recognized stocks, according to a letter sent to investors this week. Founder Shawn Badlani launched the San Francisco-based firm in May not long after stocks entered a brief free fall due to the coronavirus pandemic. He took in investor capital after Federal Reserve interventions and economic stimulus programs propped financial markets. Honest Capital fund remains small – under $100 million, a person familiar with the firm said – but 2020 returns, after fees, compare with 11.6% average gains for hedge funds, according to Hedge Fund Research, and a 16.2% rise in the S&P 500 Index. It is a success story as only 346 new funds, the smallest number in two decades, launched and 619 shut down during the first three quarters of 2020, HFR data shows. The stellar results were thanks to the firm’s focus on a handful of stocks that have potential, as opposed to a strategy of jumping on popular trends, Badlani said in the letter, which was seen by Reuters. “We are pleased with this performance,” Badlani, 38, wrote. “We believe it demonstrates that a concentrated portfolio of high quality, less followed small and mid-cap equities can drive differentiated performance.” The firm owns just nine stocks, including advertising platform Cardlytics Inc, digital media company IAC/Interactive Corp and cannabis retailer Green Thumb Industries Inc. Green Thumb benefited from more U.S. states legalizing marijuana for recreational use and Cardlytics continues to add new users and improve its customer interface. Badlani had been a partner at Marcato Capital Management for nearly a decade, until that firm shut in 2019. His former boss, Mick McGuire, learned about activist investing at William Ackman’s Pershing Square Capital Management, and investors expect Badlani to follow in their mold. At some point, he may start activist campaigns to push for operational improvements at companies and his firm name is supposed to represent the advice he will give CEOs, whether they like it or not, a person familiar with his thinking said. For now, he is running Honest Capital from home with a third party handling back-office and compliance functions, since the pandemic made it difficult to meet potential employees and investors or scout office space in person.