Preqin currently tracks 519 activist hedge funds collectively managing over $140bn in assets, an increase from the $127bn as of December 2014. Activists take an approach to investment which is akin to that of private equity, an approach which typically involves a long time horizon. By engaging with management and participating in strategic decision making, they seek to maximize shareholder value, for example through operational improvements and financial restructuring. The anatomizing nature of the strategy generates headlines and can lead to distrust; activists have been known to depose CEOs of major corporations (notably Sotheby's, Microsoft and Procter & Gamble) and radically shake up management teams. So, while activist hedge funds can certainly catch the public’s attention, do they also deliver returns for investors?
Preqin’s Hedge Fund Analyst online service tracks the performance of hedge funds pursuing a shareholder activism strategy. As shown in the chart below, activist hedge funds have enjoyed a strong start to 2015, with year-to-date returns of 6.85% (as of 30April 2015), surpassing the Preqin All-Strategies Hedge Fund benchmark (+4.36%). This superior performance of activists has become the norm over recent years. The 12-month period ending 30 April 2015 saw an average return for activist hedge funds of 12.16%, exceeding hedge fund returns as a whole by nearly five percentage points. Approximately 30% of activist hedge funds have shown year-to-date returns exceeding 10.00%, compared with hedge funds as a whole, where only 14% have accomplished the same feat.
Elliott Management’s Elliott International Ltd is the largest activist vehicle, with $16.7bn in assets under management as of September 2014. The fund is currently embroiled in a conflict with Samsung Group, intending to block a takeover of Samsung C&T by Cheil Industries. Both firms are key companies of Samsung Group. At the time of writing, the activist – the third largest shareholder in Samsung C&T – has filed a court injunction in Seoul to stop Samsung C&T from selling treasury shares to KCC Corp. The sale would provide sufficient voting rights to facilitate the proposed takeover by Cheil.
This recent example illustrates the influence activist hedge funds can exert on some of the world’s largest corporations. Paul Singer (Elliott Management’s founder) is among the ranks of the experienced giants dominating the activist arena, along with Carl Icahn, Daniel Loeb, Nelson Peltz and Bill Ackman, to name a few. Activists can target any company regardless of its market capitalization; Apple, DuPont and Dow Chemicals have all found themselves in the sights of activists in recent times. Activist hedge funds have also developed an appetite for the fast food titan McDonalds. Jana Partners, Corvex Management (whose founder Keith Meister was previously Icahn’s right-hand man), Glenview Capital Management and Highfields Capital Management are activist investors which have acquired or increased their stake in the chain.
Preqin’s Hedge Fund Analyst shows that 34 new activist hedge funds launched in 2014. In 2015 year-to-date, only seven activist hedge funds have been launched. Despite the impressive performance and strong investor interest (Preqin’s Hedge Fund Investor Profiles online service shows that there are currently 166 investors with a preference for activist funds) in the strategy, competition among activist hedge funds remains intense. While activism continues to gain ground, the opportunities are tilted in favour of the well-established and larger managers, yielding challenging conditions for new entrants.