The Year of the Activist Hedge Fund

Mar 11 2008 | 2:53pm ET

By Damien Park -- For the past year, people have speculated activist-style investing would go the way of the Internet boom and bust witnessed earlier this decade.  However, despite a weaker economic outlook, shaky credit markets, and a subprime turmoil upending financial markets worldwide, activist hedge funds continue to grow at remarkable rates in both number and in assets under management.

Indeed, by all measures, activist investing is showing signs of credence even when other hedge fund strategies, such as quantitative investing, seem to be faltering.  Much of their sustainability can be attributed to advantages in the way these funds are structured, while controversial methods of accumulating substantial ownership stakes, tag-team campaigns and new stock exchange rules should continue to foster their growth for years to come.

While many hedge funds have seen investors fleeing for the exits, on a whole, the activist fund has maintained a steady stream of capital inflows.  One explanation for this can be ascribed to the fact that these investors have somewhat of a secret weapon:  longer lock-up periods.

Unlike most hedge funds that allow investors to withdraw funds on a quarterly or semi-annual basis, activist-style investment vehicles typically require investors to commit to investing in the fund for a period of two to three years.  In a poor economic environment, this can be the difference between a fund’s success and failure, and has two real tangible benefits.  First, activists are less concerned with monthly returns, ongoing redemptions and fund maintenance, which allows for a longer-term outlook on stock picking; and second, a weaker stock market often generates better investment opportunities in fundamentally sound businesses – the Rosetta Stone of an activists’ stratagem.

Armed with a greater number of militiamen and enlarged stockpiles of weaponry, activist investors are continuing to wreak havoc in boardrooms across America by being more vocal and by launching more campaigns against the establishment than ever before.

Explosion of Activist Investing

Early this year Carl Icahn, one of the world’s most notable activist investors, casually remarked in an interview, "In today's environment, there are a great number of companies that can use activism… I think we're going to be very active this year.” 
Based on the number of activist situations since the beginning of January, it’s safe to say Icahn isn’t the only one keeping busy.  More than eighty activist campaigns have been launched at US companies across practically every industry during the first seven weeks of 2008.  And while many of the insurgent names are familiar from proxy ballots a year ago (Nelson Peltz’s Trian Fund, Warren Lichtenstein’s Steel Partners, Dan Loeb’s Third Point, and Barry Rosentein’s Jana Partners), plenty of newcomers are establishing themselves on investor relations watch lists as “investors of interest,” adding to new levels of uneasiness in weekly management meetings and regularly scheduled board meetings.

The growth in activist hedge funds over the past few years has been nothing short of tremendous.  Over 75 hedge funds are currently dedicated to an event-driven, activist-style of investing, managing more than $50 billion in assets in the US alone, making these juggernauts a powerful force to be reckoned with.  In addition, there are hundreds of institutional and high net worth investors managing many more billions of dollars who are opportunistically adopting activist-style investing techniques in order to press for change in underperforming companies around the globe.

So far this year, US companies confronted with demands from activist investors attempting to influence change to corporate systems, structure and governance has risen by more than 30% over the same period in 2007.  And while some ask for improved disclosures around executive compensation schemes and political contributions, most demands are for board representation, hiring financial advisors to evaluate value improvement initiatives, restructuring balance sheets and changing management.

Furthermore, while asset-rich retail businesses and maturing Silicon Valley–based technology companies are currently attracting a disproportionate share of attention from activists this year, very few industry sectors seem immune to the activists’ advances.

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