Motley Fool – When sailors of yore saw the Jolly Roger — the black pirate flag emblazoned with a skull and crossbones motif– they filled with terror and dread over what was to befall them at the hands of the dreaded likes of Blackbeard, Calico Jack, and Captain Kidd. Vicious and treacherous, pirates would show theirvictims no mercy or quarter.
Shiver me timbers, but the people who run children’s pizza-and-party company CEC Entertainment (NYSE: CEC) must be wondering what will befall them now that the black flag has been hoisted against them. Connecticut-based hedge fund Pirate Capital filed a Schedule 13D with the Securities and Exchange Commission announcing that it has acquired more than 6% of the company’s shares in recent weeks. Arrr!
The hedge fund indicated that although it has no specific plans currently for pursuing activism at CEC, best known for the Chuck E. Cheese “entertainment zones” it runs, it says it will consider actions related to “strategic direction and corporate governance” if the pizza and games purveyor — itself a Motley Fool Hidden Gems recommendation — doesn’t right the listing ship soon. Its share price has lagged the market significantly since it was first picked by the small-cap newsletter service last year, down 13% compared with an 11% gain for the S&P 500 index.
Hedge funds, as we’ve written about before at the Fool, are investment pools of the super-rich intended to make big bets — i.e., assume lots of risk — in hopes of making big returns for their investors. While that risk-taking has led to some spectacular blowups (remember Long Term Capital Management?), it has often resulted in tremendous returns that have elevated hedge funds to mystical status. Even so, the average hedge fund has not beaten the stock market since 2002, when they posted gains of 3% compared with losses of 20% for the index of world markets.
Avast, me hearties! But hedge funds have taken on a greater role lately as they pursue those greater returns. They have become corporate activists, taking on causes to improve shareholder value, which oftentimes means ousting current management.
