Who Benefits from Hedge Fund Activism?
Investing in a hedge fund that uses shareholder activism is an option for many UK investors. Hedge funds aren’t altruistic: they shake things up at the corporate level in order to make money! But sometimes their activism benefits other groups as well.
Research concludes overwhelmingly that hedge-fund activism is positive for all the major parties – except perhaps the small group of departing CEOs who find themselves on the wrong end of the campaign.
Advantages for the company
One definitive study of shareholder activism finds that:
Hedge fund activists improve both short-term stock performance and long-term operating performance of their targets. The most dramatic changes in performance accrue to targets where activists seek corporate governance changes and reductions in excess cash.
Nicole M. Boyson and Robert M. Mooradian
Advantages for the wider company investor base
Researchers looking at 888 activist campaigns (launched by 131 different funds) between 2001 and 2005 reveal that:
The announcement of a programme of activism by a hedge fund . . . results in large positive abnormal [share price] returns, of between 5 to 7 per cent, during the announcement window and that these returns are not reversed one year after. . . . The events which generate these positive returns tend to involve changes in business strategy (such as refocusing and spinning off non-core assets) or the sale of target company.
Alon Brav, Wei Jiang, Frank Partnoy and Randall Thomas
Advantages for the hedge fund and its investors
Unsurprisingly, this group benefits! One study looking at 151 hedge-fund activist campaigns between 2003 and 2005 reports that:
Hedge fund targets earn 10.2 per cent average abnormal stock returns during the period surrounding the initial Schedule 13D.
April Klein and Emanuel Zur
Another study came to the same conclusion, suggesting that the risk-adjusted annual performance of hedge funds seeking changes in corporate governance is about 7–11 per cent higher than ordinary (non-hedge) investors.
Another way of looking at the same data is to track the performance of activist hedge funds within broader hedge-fund indices (which track returns from different strategies). The HFRX index series separates out shareholder activists (under the category ‘event driven strategies’) and finds that in 2012 they returned 6.6 per cent, but lost 16 per cent in 2011 (2010 returns were +15 per cent and 2009 returns +44 per cent).