Should Investors Be Wary of Activist Hedge Funds?

by Dominic Fogarty

  • 03 Jul 2017
  • HF

Preqin’s Hedge Fund Online currently tracks 793 activist hedge funds. While most shareholders will be passive, activist hedge funds can work with a company’s management  to unlock the value for the benefit of all shareholders. However, this approach does not always deliver value, and there have been several cases of activist investments in companies, such as Valeant Pharmaceuticals, resulting in losses for high-profile hedge funds. With this in mind, we take a look at the current trends within activist hedge funds.

Performance and Flows
According to the Preqin All-Activist Hedge Fund benchmark, activist hedge funds returned just 2.01% in 2015, marginally underperforming the Preqin All-Strategies Hedge Fund benchmark. The majority (71%) of investors interviewed for the Preqin Investor Outlook at the end of 2016 reported that activist hedge funds had fallen short of their expectations that year. This underperformance led to outflows of $35bn for activist hedge funds in 2016, accounting for 32% of all hedge fund outflows during the year.

However, with funds returning 0.43% in May 2017, stronger performance so far this year has brought 12-month cumulative returns to 15.56%. Such returns outweigh those of the Preqin All-Strategies Hedge Fund benchmark (+10.47%) over the same period. Despite this, Q1 2017 saw only $0.9bn in inflows for activist hedge funds, compared with $20bn for the entire hedge fund industry.

Launches and Liquidations

As shown in the chart above, the number of fund launches rose each year from 2012 to 2014, peaking at 82 new funds globally in 2014. Since then, however, fewer funds are being launched each year, and the number of activist fund liquidations has increased concurrently: net fund launches have therefore declined year-on-year from 2014. This trend may continue into 2017, as so far this year liquidations have outnumbered launches.

The high number of liquidations and size of outflows in 2016 could reflect investors’ dampened appetite for activist funds following underperformance in 2015. Despite strong performance over the past 12 months, investors are still wary of allocating capital to activist hedge funds, with no investors interviewed by Preqin citing any intention to increase their allocation to the strategy in 2017. However, if there continues to be opportunity in activist hedge funds and this strong performance continues, investors may begin to view the activist hedge fund space with renewed enthusiasm, akin to that of previous years.



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