| Activist hedge fund returns decline |
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| 10/06/2007 | |
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Activist hedge funds continue to enjoy respectable returns and the strategy is being more widely employed than ever. However, a study by the Wharton School at the University of Pennsylvania cautions that the average return from hedge fund activism has steadily declined from 9% in 2001 to 3.1% in 2005. Although it is still too early in the cycle to predict the fate of hedge fund activism with certainty, if activism can be viewed as another form of arbitrage, "then it is likely that the abnormal returns associated with it will decline or even disappear, as more funds chase after fewer attractive targets and as the market incorporates the potential for investor intervention and improvement in security prices," according to the report. Hedge fund activism has sparked widespread interest in recent years, though there is a dearth of sample evidence on the investment strategy. The Wharton study is one of the first to take an in-depth look at this particular approach. The authors of the report surveyed 888 events launched by 131 activist hedge funds, including hostile and non-hostile interactions between funds and targets. The sample, the most extensive of hedge fund activism to date, extends from the start of 2001 to 2005. They found that the market reacts favourably to hedge fund activism and that the "abnormal" return upon announcement (or filing date) of potential activism ranges between 5-7%, with no apparent reversal in the following year. Activist demands "Contrary to media reports that investors welcome changes in target capital structure and governance, we find that the market response to capital-structure related activism, including debt restructuring, recapitalisation, dividends and share repurchases, is statistically insignificant. We find a similar lack of reaction for governance-related activism, including attempts to rescind take-over defences and to oust CEOs or curtail their compensation. Instead, events that are associated with positive abnormal returns involve more dramatic proceedings such as changes in business strategy such as spinning off non-core assets and the sale of the company." Despite their aggressive behaviour, activist hedge funds do not typically seek control in target companies. The median ownership stake is about 10% and these relatively small stakes distinguish them from the corporate raiders of the 1980s. "Finally, we present important new findings for the policy debate about hedge fund regulation. For example, our evidence suggests that activist hedge funds are not excessively short term in focus as some prominent US lawyers have written." VB |
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