New York (HedgeCo.Net) Activist hedge funds have garnered more than their fair share of media attention in recent months.
“Activists Loeb, Meister Take Large Stake in Yum”
“Study: In Activist Investing, Size Matters”
“How you can invest with activists like Icahn”
Activist investing is not new, but it has changed. In the 1980’s activist investors were called “corporate raiders” and there were even a few movies made about the practice: Wall Street, Barbarians at the Gate and the comedy starring Danny DeVito Other People’s Money. So what has changed? Why are activist hedge funds and their managers making headlines again?
In the 80s, leveraged buyouts were all the rage and junk bonds were the favorite form of financing. Now the activist investors invest in the stock so that they can get a seat at the table and insist on change in the internal structure.
With the stock market enjoying one of the greatest bullish periods in history and bond yields hovering near their lowest levels in history, investors are looking for respectable returns wherever they can get them. With the bull market, traditional hedge funds have lagged the overall market, so investors are turning to non-traditional hedge funds as a result—enter the activist funds.
While activist hedge funds have enjoyed superior performance to strategies such as long/short equity funds over the last few years, the barriers to entry are considerable. Even with minimum investment levels of $1 million or more, most of the top activist funds are closed to new investors.
The study mentioned among the headlines above was conducted by three researchers: C.N.V Krishnan of Case Western Reserve, Frank Partnoy of UC San Diego and Randall Thomas of Vanderbilt University. They looked at 1,262 interventions by hedge-fund activists from 2008 through mid-2014. What the data shows is that during the years in question, stocks targeted by activist investors did perform favorably with an average return of 5.8% in the first 21 days after the activist investor disclosed their stake.
Some of the success has to be attributed to general market direction over the last six years and to some degree the disclosures can become self-fulfilling prophecies. When an investor like Bill Ackman or Carl Icahn reaches the point that they have to divulge their investment in a company through a 13d filing, other investors are bound to follow suit and hope to piggy back on the success. As the other investors buy shares, it is bound to drive the price higher, especially over the short-term.
This is not to say that the best activist investors aren’t truly playing the role of “activist”, but measuring the success over a short-term period seems short-sighted. Looking at the success after a year or two will truly measure whether the activist fund was successful in getting the underlying company to make changes. The study showed that the target companies did see improvement in their operating metrics and that confirms earlier studies.
Activist investing has garnered enough attention in the last six years that there have even been ETFs launched using the strategies or at least investing in the targeted companies of activist hedge funds. The Global X Top Guru Holdings Index ETF (AMEX: GURU) was launched in June 2012. From its launch through the end of 2013, the fund was able to outperform the S&P 500 by a considerable margin. Over the last 16 months, the index has outperformed the ETF 2.5 times over. What is more concerning about the ETF is that it has started to track very closely with the index and in some instances it has not performed well at all. In the market decline from mid-September to mid-October, the S&P fell 7.4%, but the GURU fund fell 11.05%.
While activist funds have their merits, they are not an end-all, beat-all strategy. Much like the co-investment funds featured in last week’s newsletter, most of the funds are lumped in to the hedge fund category, but the portfolios aren’t typically hedged.
Given the performance of the GURU ETF and how the market has been in a bullish phase for over six years now, it will be interesting to see how activist funds perform during the next bearish cycle. Will they be able to maintain their performance numbers? Being that they are not hedged or making bearish bets, it will be difficult for them to provide positive returns. With the models on the HedgeCoVest platform, the majority of funds are either hedged or making bearish bets in some form or another. The next bearish cycle will be the true measure of how activist funds perform against traditional hedge fund strategies.