Activist Hedge Funds

Activist Funds

Activist funds generally buy a large enough chunk of the company to be able to participate in the management and decision making. Many blend in activist hedge funds with event driven which I disagree with. Activist funds are more closely related to value or private equity. Although there are many cases where a large shareholder of an acquiring or target company will have input in the pressure to go ahead or fight off a hostile takeover, generally merger arbitrage and other sophisticated news driven event- arbitrage are not driven affected by activists.

Activists are generally viewed as locusts sacrificing the long term prospects of a company for short term price and dividend gains.

Explosive growth Estimated invests in hedge funds

This was definitely true in the 80’s and 90’s were they were labeled as corporate raiders. Study has shown however that they boost S.T and L.T price performance and actually work with management to improve corporate situations. In the post Enron period activisms are being viewed as hero’s. Since the Enron collapse laws such as Sarbanes-Oxley Act of 2002 have made corporate management more accountable and this has led to a boost in shareholder activism. The study shows that announcement of hedge fund activism adds over 5% to the price of the stock and the most impact is when the activism is focused on change of strategy and selling inefficient parts of the business. A change in management and capital structure has less impact. Activists however are still not always popular in the board rooms. Study has shown that activists have on average decreased CEO pay by over 800’000 USD and management turnover has increased by 9%.

One of the most well known activists is Carl Icahn. Although he is mainly a private equity investor, he opened up two hedge funds: - Icahn Partners and Icahn Fund. With them he has bought stakes in major companies such as Blockbusters and Time Warner. In 2005 he won board seats at Blockbusters and is now a director of the company. He also teamed up with Jana Partners to break up Time Warner Inc in 2006. Although the attempt failed, Time Warner’s share price did rise over 12% in 2006 through November. Icahn is well known for his aggressive approach in influencing the financial strategies of the companies that he owns a stake in.

Activists hedge funds also come in blends. For example Omega Advisors is a value activist. In 2005 he berated MCI for accepting a takeover bid by Verizon which he thought was offered at a price too low. Activists have performed the least well relative to other major equity hedge fund types and they have not done immensely well relative to market. The most well known activist hedge funds is ESL Investments which is an 18 billion USD hedge fund founded by Edward Lampert. ESL is the largest shareholder of Sears which owns KMART, where Lampert serves as the chairman.