Investor Appetite for Activist Hedge Funds Rises as Fund Managers Outperform – January 2015

by Michael Brown

  • 30 Jan 2015
  • HF

Data highlighted in the newly released 2015 Preqin Global Hedge Fund Report shows that 166 institutional investors worldwide are known to invest in activist hedge funds, a figure which has been increasing over the past few years. At the end of 2014, investors in activist hedge funds represented over 3% of the institutional investor universe, compared to just over 1% in 2012. This increase in appetite can be largely attributed to the success of managers utilizing the strategy over recent years and the ability of managers to produce absolute returns through shareholder activism. Indeed, Preqin’s Hedge Fund Analyst online service shows that the activist hedge fund benchmark has outperformed the annualized performance of the All-Strategies Hedge Fund benchmark for the past two, three and five years.

The vast majority of these investors (67%) are located in North America, suggesting that investors outside this region have a tendency to be more cautious when considering investing with activist fund managers. A further 16% of investors in the strategy are based in Europe, 13% in Asia-Pacific and 4% located in the Rest of World region.

Foundations account for 33% of investors with an appetite for activist hedge funds, with other significant investor types such as private sector pension funds (representing 19%), fund of hedge funds managers (15%) and public pension funds (13%) also investing. This demonstrates diversity within the hedge fund investor universe of those seeking returns through their exposure to activist hedge fund managers. Endowment plans and insurance companies are also investing in significant numbers, at 9% and 5% respectively.

Although activist hedge funds were unable to match the same double-digit returns in 2014 as they posted in 2013, they still outperformed the wider industry in 2014, generating 5.10% compared to the 3.78% posted by the All-Strategies Hedge Fund benchmark. Activist hedge funds are demonstrating a rise in prominence within the industry, not just through making headlines in the financial press, but also as an increasing number of investors are developing a preference for the strategy. While investors with a preference in activist hedge funds appear to be concentrated in North America, particularly the US, investors vary by type, which shows diversity within the institutional investor universe. Looking forward, it will be interesting to see how the investment environment changes if activist hedge fund managers can continue to outperform expectations and post absolute returns in 2015. 

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