Activist hedge funds driving improvements in company performance
Published: 24 February 2015
Activist hedge funds globally are driving improvements in the share price, operating performance and governance of the companies in which they invest, according to a new paper by AIMA, the global hedge fund industry body.
The findings are contained in a paper, titled 'Unlocking Value: The Positive Role of Activist Hedge Funds', which AIMA has produced in conjunction with the law firm Simmons & Simmons.
Among its findings:
- Activist engagement by hedge funds is positively correlated to improvements in the share price and operating performance of targeted companies
- Activist hedge funds seek higher standards of corporate governance from the companies in which they invest, which improves alignment of interest between management, shareholders and other stakeholders
- Activist hedge funds leave a positive and lasting legacy, with a 25% improvement on average in the share price of targeted companies two years after an exit
- Activist hedge funds are long-term shareholders, with an average holding period of about two years, compared to the equities market average of just three months
- Contrary to popular belief, most engagement by activist hedge funds is collaborative and constructive
- The activist hedge fund sector worldwide comprises around 165 firms and manages approximately $120 billion in assets – a six-fold increase in the last 10 years
- The sector’s compound returns from 2012-2014 were over 50%
Jack Inglis, AIMA CEO, said: “An assessment of the value of activist hedge funds to the broader economy is long overdue. We regard activist hedge funds as the keys that are unlocking value in public and private enterprises, delivering gains to their investors, the companies in which they invest, and ultimately, the broader economy.
“By taking significant but non-controlling stakes in companies, and holding those positions often for years at a time, activist hedge funds are supporting improvements in the performance of thousands of firms around the world. Struggling businesses are being turned around, well-run businesses improved, capital more efficiently allocated and the interests of managers, shareholders and other stakeholders better aligned.
“What this means, more broadly, is that activist hedge funds are bringing improvements to the efficient allocation of capital and resources in the economy overall, which is one of the key benefits of capital markets financing as opposed to bank financing.”
The full paper as well as a four-page summary are available on the AIMA website.