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Nov. 21, 2014 10:09 p.m. ET

Jonathan Herbert doesn’t share other investors’ deep anxiety about a recession in Europe.

One of the region’s best-performing equity hedge fund managers this year, the Swiss native runs the Camox fund, a value-driven long-short investor based in London. Herbert’s fund buys lesser-known small- and mid-cap European stocks that he believes are on the verge of faster earnings growth because of a product break-through or a turnaround in their business.

Leading performer Herbert has played a lot of small-cap European shares to big gains this year while shorting giants Danone and Unilever. Photo: Chris Gloag for Barron’s

“Even though Europe is mired in anemic growth, it really doesn’t matter because our companies are innovating and actively selling their products in China, Latin America, and the Middle East,” says Herbert, 42. “It’s paradoxical that many of our companies are exhibiting organic growth rates between 5% and 20%, when gross-domestic-product growth in Europe is basically at zero.”

Herbert looks for companies that dominate narrow global industries. Recent investments have included one in the aluminum auto-engine-parts business and another in enterprise software made specifically for banks. By his estimates—usually based on a multiple of enterprise value divided by earnings before interest and tax—his picks tend to trade at a 40% discount to their large-cap peers, and their organic growth rate is four times as fast. He’s short a number of big, household names.

The preference for small-caps has evolved over time for Herbert, who was raised in the French-speaking Swiss village of Cologny by an Israeli father and an American mother. He first became interested in the group while working as a stockbroker at Deutsche Bank and then at private bank Lombard Odier Darier Hentsch, in Zurich. He realized risk-averse institutional investors weren’t fully exploiting the opportunity.

“If you can capture that explosive growth in terms of investing in the company at the right point in time, and if the company is cheap enough that you have a margin of safety, that is where the money is to be made,” says Herbert, who has a joint master’s degree in economics and business administration from the University of Lausanne.

His Camox fund (derived from the Latin word for a breed of mountain goat native to the Swiss Alps) has posted outstanding returns this year, rising 24.77% through Sept. 30, according to fund tracker BarclayHedge. That is nearly six times the MSCI World Index’s meager 4.33% return in the same period. Over three years, Camox has returned 33.01% annualized, more than double the MSCI’s 16.80% return.

The gains helped boost assets under management to $255 million (205 million euros) by early October, from just $7.6 million when Herbert started with a single analyst in February 2008. Camox’s management fee ranges from 1.5% to 1.7%, plus a performance fee of 17% to 20%, depending on how long investors agree to lock up their money in the fund. Minimum investment is $500,000.

“He does not fall in love with stocks,” says Gilles Lambotte, a partner at Octogone Group, a financial advisory in Geneva that has invested in Camox. “He gets in and out with conviction.” In September, when euro-zone inflation fell to its lowest level in five years, Herbert believed “the market was slightly overvalued,” so he liquidated 25% of his portfolio. German stocks fell by 16% in subsequent weeks, so Herbert used the cash he’d raised to buy stocks.