In recent years, activist hedge funds have become extremely prevalent in the financial marketplace. If an activist manager believes that more value can be extracted from a company, then they will purchase a significant level of stock and look to influence various aspects of the company’s operation, with the goal of maximizing shareholder value. Bill Ackman of Pershing Square Capital Management and David Tepper of Appaloosa Management are two such activist hedge fund managers which have led public proxy battles against companies in recent years to bring about change they view as positive. Using Preqin’s Hedge Fund Online, which tracks 381 activist hedge fund managers globally and 229 located in North America, this blog will analyze the performance of North America-based activist hedge fund managers as they have navigated a volatile market over the past year.
Despite North America-focused activist funds recording three consecutive months of negative returns in Q3 2015, strong gains in February (+3.19%), May (+2.18%) and October (+2.59%) drove the benchmark to 4.25% for 2015, higher than both the Preqin North America Hedge Fund and the Preqin Activist Hedge Fund benchmarks, which finished the year on 0.39% and 3.05% respectively. However, North America-focused activist hedge funds underperformed compared with 2014 returns (+12.36%).
The beginning of 2016 provided challenging conditions for North America-focused fund managers, with the S&P 500 Index dropping 5.50% in 2016 (as of the end of February). However, more positive conditions in March saw North America-focused activist hedge funds return 3.45% for the month, outperforming the Preqin North America Hedge Fund benchmark by 54 basis points. Despite this outperformance, the Q1 2016 return of -0.89% recorded by North America-focused activist hedge funds signals their worst first quarter since 2008.
Despite not delivering the same levels of returns to investors over 2015 that were seen in 2014, the longer term performance of North America-focused activist funds remains significantly stronger than both the Preqin North America Hedge Fund and the Preqin Activist Hedge Fund benchmarks. Not only have North America-focused activist funds outperformed comparative benchmarks in recent quarters, but they have also delivered greater returns to investors over both two- and five-year periods.
Overall, North America-focused activist hedge funds have outperformed the wider activist and North America benchmarks over both the long and short term. While the beginning of 2016 proved a challenging environment, activist fund managers will be seeking to build on the returns gained in March.