Research Primer: Hedge Fund Activisim
The Conference Board has issued an informative primer on how corporations and investors should deal with activist hedge funds. It should for make interesting reading for public company executives, investors and the hedge funds themselves.
The Board is seeking public comment by April 30 on the 73-page Report of The Conference Board Research Working Group on Hedge Fund Activism: Findings and Recommendations for Corporations and Investors.
In addition to a set of recommendations, the report includes a trove of useful background information, such as lists of the largest hedge funds, activist hedge funds, and examples of hedge fund activism campaigns and strategies.
Traditionally, research on shareholder activism has focused on the role of institutional investors, the report says.” Overall, it has shown that, at least in the United States, resources invested in overt activism remain marginal, and, when deployed, these efforts are conducive to overall positive organizational changes but insignificant market reactions. However, new empirical studies now suggest that activism can prove more successful when the campaign is mounted by hedge funds. ”
According to these findings, target companies of event-driven hedge funds can earn as high as 17 percent abnormal returns during the period surrounding the initial 13D filing (+/-20 day window).
Since 2003 hundreds of instances of shareholder activism involving hedge funds were reported. Tactics deployed by hedge fund activists include:
- Leveraging a company’s balance sheet so as to return cash to shareowners—a tactic that ,critics charge, weakens companies long-term
- Assuming an operating role, blurring the lines between themselves and private equity
- Advocating for a quick sale of the company
- Seeking a change in top management.
In nearly two-thirds of cases, corporate management either immediately agreed to the funds’ demands or—after a phase of initial resistance and negotiation—agreed to major concessions to meet the activists’ expectations.
Often the mere threat of a proxy battle and the resulting media scrutiny is enough to bring about the changes sought by the activist hedge funds.
There is also specific evidence that in 72 percent of media-reported cases of proxy contests initiated by hedge funds, proxy advisors have sided with the activist investors and recommended a vote in favor of their proposals.
The Group’s common sense recommendations (spelled out in more detail in the full report):
- Remain informed on institutional holdings and securities trading activities.
- Understand hedge fund investment strategies and activist tactics.
- Be aware of strategic, financial, and governance vulnerabilities, and remain open-minded about change.
- Participate in the formulation of response strategies and ensure their proper implementation.
- Engage in an open dialogue with investors and gatekeepers.
- Promote transparency and integrity of the voting process.
- Perform ongoing due diligence as part of the investment process in activist hedge funds.
- Strengthen governance practices and participate in the discussion and implementation of activist strategies.
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