Studies of the first wave of hedge fund activism suggested that activism might be in decline as the market for activism grew, competition increased, and the most viable opportunities for interventions declined. Bebchuk, Brav and Jiang (2013) find that hedge fund activism through 2007 was followed by improved operating performance during the post-intervention 5-year period. These characteristics make it easier for activists to acquire a significant stake quickly.Ĭlifford (2008), Brav, Jiang, Partnoy and Thomas (2008), Bebchuk, Brav and Jiang (2013), Klein and Zur (2009), and Becht, Grant and Wagner (2014), and others, suggest that hedge fund activism generates significantly higher announcement period abnormal stock returns than a control sample of passive block holders, and that hedge fund activists have achieved measurable success, at least in terms of traditional metrics such as Tobin’s Q. Targets exhibit significantly higher institutional ownership and trading liquidity.
Relatively few targeted companies are large-cap firms, which is not surprising given the comparatively high cost of amassing a meaningful stake in such a target. Target companies also have more takeover defenses and pay their CEOs considerably more than comparable companies. Payout at these companies before intervention is lower than that of matched firms. In sum, hedge funds are better positioned to act as informed monitors than other institutional investors.īrav, Jiang, Partnoy and Thomas (2008) find that hedge fund activists tend to target companies that are typically “value” firms, with low market value relative to book value, although they are profitable with sound operating cash flows and return on assets. After the financial crisis, hedge funds have been subject to some new regulation, including limited disclosures to regulators, but those have not fundamentally altered their business. Hedge fund managers also suffer few conflicts of interest because they are not beholden to the management of the firms whose shares they hold. Hedge funds employ highly incentivized managers who manage large unregulated pools of capital.īecause they are not subject to regulation that governs mutual funds and pension funds, hedge funds can hold highly concentrated positions in small numbers of companies, and use leverage and derivatives to extend their reach.
Unlike mutual funds and pension funds, hedge funds may be able to influence corporate boards and managements due to key differences arising from their different organizational form and the incentives that they face. Research by Brav, Jiang, Partnoy and Thomas (2008) Klein and Zur (2008) suggested that the opposite is true of hedge funds. Several studies show that when institutional investors, particularly mutual funds and pension funds, follow an activist agenda, they do not achieve significant benefits for shareholders (Karpoff (2001), Romano (2001), Black (1998), and Gillan and Starks (2007)). Hedge funds are engaging in a form of shareholder activism and monitoring that differs fundamentally from previous activist efforts by other institutional investors.
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