Hedge Funds & Activist Investments

Filed in archive Hedgetalk on February 19, 2007

With so many activist hedge funds announcing their status as major shareholders and taking positions of control within already established companies, I would think that investors would be well advised to pay close attention to the holdings of these activist hedge funds.

Just today there was another example of effective shareholder activism. Major Hedge Fund Shareholder Proposes Restructuring of Trust.

Here's a study called "Hedge Fund Activism, corporate governance and firm performance," written by four law and finance professors. They researched over 900 cases of hedge fund activism, and released the findings. It's an insightful read for anyone interested in getting in on the action.

One approach the professors reveal in the study is that investors who want to get involved in the running of a company could buy stock immediately after a hedge fund notifies the S.E.C. that it has acquired a 5% stake of the target company. According to the S.E.C. it is mandatory that hedge funds report their ownership stake in a public filing within 2 weeks of their holding reaching 5%.

Therefore the investor could get in ahead of the changes that usually follow when a hedge fund takes over. The professors found that the stock of the average company singled out by a hedge fund outperformed the overall market by 7 percentage points over a four-week period.

The New York Times does a shorter version of the study here.