If you’ve yet to read this recent article in Reuter’s, the thought may not have crossed your mind. However, after reading this, one does not necessarily come away with the sense that the question has been answered. Rather, it has been posed.
What Is an Activist Hedge Fund?
Activist hedge funds are best defined as funds that acquire a substantial stake in a publicly traded company with the intent of seating or unseating board members, which provides the fund with the ability to participate in management and decision-making. Traditionally, activist hedge funds were viewed through the lens of funds that had chosen to employ a private equity approach to public markets and these activist funds were perceived to have ‘long-term’ goals.
The activist hedge fund is typically less diversified than funds pursuing other strategies, because a substantial investment is typically required to gain leverage over the target company. For this reason alone, activist hedge funds are not for the faint of heart.
What Has Changed?
Today, activist hedge funds often do not take either the long view or the private equity model of bygone days. Instead, today’s activist fund is usually seeking the opportunity to force a merger, sale or share buyback that can provide the fund with a relatively quick gain on its investment.
Examples include Blue Harbour Group, Starboard Value, Train Fund Management, and Pershing Square Capital Management.
What Are Their Stories?
Blue Harbour Group’s claim to fame was Jack In the Box, Inc., in which it acquired a 5.2 percent stake. Blue Harbour subsequently pushed the burger chain to franchise company-owned stores and engage in share buybacks. This netted Blue Harbour a 75 percent return on investment.
Jeffrey Smith and Mark Mitchell, co-founders of Starboard Value, acquired a sufficient stake in Darden Restaurants (Olive Garden and Longhorn Steakhouse), to seat Jeffrey Smith as Chairman. Under his management, the stock rose almost 60 percent, a tremendous gain for the fund.
Nelson Peltz, founder of Train Fund Management, bought Snapple from Quaker Oats for $300 million. Three years later, he sold it for 5 times that amount.
The legendary Bill Ackman of Pershing Square Capital Management is one of two poster boys for activist hedge funds, the other being Carl Icahn.
One of Pershing Square’s most memorable achievements was the result of its stake in Allergan, the pharmaceutical firm. After acquiring his stake in Allergan, he joined forces with Valeant to push for a merger. Allergen balked and sold itself to Actavis. Nonetheless, Pershing Square and Valeant scored around $2.6 billion in gains as a result.
Hedge funds have as much of an obligation to their investors as corporations do to their shareholders. Activism is only a dirty word if, as the result of its activist efforts, investors take a loss. The examples above include only wins. Rest assured of the fact that there have also been losses. Investors understand the risks associated with investment in an activist fund—shareholders of the targeted corporation…not so much.