One of the most secretly powerful voices
in business says hedge funds are ‘wolves’ that damage typical US
Tuesday, 7 Mar 2017 |
10:53 AM ET
Delaware judge slams activist hedge funds
Tuesday, 7 Mar
2017 | 12:40 PM ET | 05:51
Leo Strine, the chief
justice of the Delaware Supreme Court, says hedge funds
are "wolves" that damage typical U.S. investors. CNBC's
Leslie Picker reports. The “Fast Money Halftime Report”
traders and Stephanie Link, TIAA Investments, weigh in.
The question posed was, "Who Bleeds When the Wolves Bite?"
It's the title of an evocative paper written by Leo Strine, the chief
justice of the Delaware Supreme Court. By wolves, he means hedge
funds, and his answer, found within a 113-page paper set to be
published next month in the Yale Law Review, is that average American
investors are the ones getting bit by the existing
While little known in circles outside the highest ranks of corporate
America, Strine's voice is among one of the most powerful in the
business community. That's because two-thirds of American companies
are legally based in Delaware, meaning corporate litigation often
takes place in that state, so his opinions on such topics can hold
Strine's paper is one of the strongest repudiations to date of
hedge-fund activism — or what critics of the industry describe as the
practice of investors with major stock holdings aggressively forcing
companies into changes that will quickly pump up stock prices, often
without regard for those same companies' long-term health.
"There is less
reason to think they are making the economy much more efficient, and
more reason to be concerned that they are perhaps pushing steady
producers of societal wealth on a riskier course."
-Leo Strine, chief justice, Delaware
Strine looks at what he calls a "flesh and blood" perspective on how
hedge funds, and specifically hedge-fund activists, are harmful to
typical American investors. He calls regular Americans "human
investors," distinguishing from the "wolf packs" of hedge funds. Human
investors are those who invest in the capital markets and save for
events like retirement or college for their children, according to
Strine's main argument is that the "current corporate governance
system ... gives the most voice and the most power to those whose
perspectives and incentives are least aligned with that of ordinary
That has allowed such investors to act and manipulate decisions by
corporations that often are not in the long-term best interest of
average shareholders, he said. He points to the "continuing creep
toward direct stock market control of public corporations," which he
says bears no accountability toward human investors.
He argued that a 10-year lockup in a private equity fund-of-funds
would be a far "more rational" choice for those saving for retirement
than a mutual fund would be, because it aligns better with the
longer-term investment horizon. However, current regulations make that
an unlikely option for most investors.
Strine's critics — largely hedge funds and hedge fund advisers —
privately criticized the paper, arguing that a justice should not be
on the record condemning a group of people who tend to litigate in his
court and the lower
Delaware courts. Additionally, they say his paper does not
offer much in the way of prescriptions for how to fix what he sees as
a flawed system.
They declined to be quoted, fearing retribution from Strine.
Strine declined to comment beyond the paper.
As performance continues to dwindle within the hedge-fund industry,
the rallying cry against them (and specifically their
short-term-minded reputation) has gotten louder. One group, including
Jamie Dimon, the chief executive officer of
Larry Fink, the chief executive officer of
Warren Buffett formed a group about a year ago to try to
find solutions for corporations to be more long-term focused. Buffett
separately took aim at
hedge funds and the fees they charge.
Strine said earlier in the decade that investors believed hedge funds
were akin to Shakespeare, writing "A Midsummer Night's Dream," until
2015 unveiled "record-breaking poor performance." He said hedge funds'
2015 reports read like a "disgraced politician's 'mistakes were made'
"There is less reason to think they are making the economy much more
efficient," he said, referring to hedge funds, "and more reason to be
concerned that they are perhaps pushing steady producers of societal
wealth on a riskier course that has no substantial long-term upside."