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Analysis of professional activists' failures to improve management of targeted companies


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Source: IR Magazine, April 3, 2019 article


Andrew Holt


Activist hedge funds are ‘impotent’, says study

Apr 03, 2019

Hedge fund activism is neither threat to corporate strength nor force for better performance

Activist hedge funds are unable to effect meaningful change at corporations, according to a new research paper by a former academic.

In a critical paper, ‘The unfulfilled promise of hedge fund activism’, JB Heaton, a former professor at the business and law schools of the University of Chicago and Duke University, pans the role of activist hedge funds.

He writes: ‘Hedge fund activism has mostly disappointed. While hedge fund activists are good at motivating sales of companies to potentially overpaying acquirers, hedge fund activism is neither the threat to corporate strength that hostile commentators have claimed nor a meaningful force for better corporate performance. Instead, more than a decade of research shows hedge fund activism to be economically unimportant to corporate performance one way or the other.’

Heaton believes there are three reasons why hedge fund activism has mostly disappointed. First, hedge fund activists have no comparative advantage in generating ideas for meaningful competitive advantage at target firms. Second, these activists likely suffer from a form of winner’s curse where the hedge fund activist is too pessimistic about the firm it targets. Third, they often target declining firms, the equity in which is unsalvageable by the time the activist has taken notice.

Hedge fund activism has been equally unimpressive for investors. ‘Many hedge fund activists suffer from a ‘physician, heal thyself’ problem of the first order,’ asserts Heaton. ‘For example, Elliott Management, the best-known activist firm, eked out just better than 2 percent in 2018. For all its sturm und drang around the world, Elliott has not returned more than 16 percent in any year since 2009.’ IR Magazine contacted Elliott for comment, but the company did not respond.  

Heaton adds that the activist narrative is central: ‘Hedge funds, like other asset managers, are most successful in raising funds from investors when they have a good story for their investing approach. Hedge fund activists have a good story… Unfortunately, the story turns out to be pretty uninteresting. Hedge fund activists appear to do one thing that matters: encourage companies to sell themselves. That’s about it.

‘[They] are otherwise more or less impotent to effect meaningful change at corporations. There are no great activist success stories, no one or two companies we look at in agreement that it was hedge fund activism that turned the company around or took a good company to a significantly higher level.

‘Despite the vigorous debate in the press and academic journals, it now seems clear that capital market participants and corporate directors and officers need not be fearful of the challenges [posed by] hedge fund activists.’


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