Activism Pays, Especially If It's Hostile: Ivy Study |
Date: Wednesday, June 13, 2007
Author: Chidem Kurdas, HedgeWorld
NEW YORK (HedgeWorld.com)—An examination of a
large sample of regulatory filings showed that activist hedge funds
more often than not get what they want from target companies, succeed
in improving the business and make substantial returns.
This review of 13D filings identified almost 800 interventions by 131
hedge funds from 2001 through 2005. Hedge funds were more successful
than other investors like pension funds and mutual funds in achieving
their goals. Two-thirds of the time they attained their aims and on the
whole were able to curtail the compensation of company managers and
oust chief executives.
Their actions boosted companies' long-term performance and
increased the payout, resulting in robust returns for investors.
Various types of hedge fund activism gave rise to above-benchmark
gains; for instance activism aimed at the sale of a target company on
average generated a return of almost 11% above a benchmark.
Surprisingly, hostile intercessions got more favorable results than
friendly activism. Confrontational events generated about 12% returns
while friendly ones generated only 5.3%. Since by definition company
managements resist hostile intrusions, the improvement in company value
must come through hedge fund actions, according to the report.
Anyone who acquires more than 5% of a public company's shares
is required to file a Schedule 13D with the U.S. Securities and
Exchange Commission. This study and a related one on short selling were
prepared for Ivy Asset Management Corp. by Columbia Business School
professors.
The short selling study used data from the New York Stock Exchange for
a period from 2000 to 2004. It found that nearly 13% of the volume on
the exchange was generated by short trades, demonstrating that even for
the smallest NYSE stocks many traders overcame the cost and other
impediments to short selling.
The Columbia professors also found that heavily shorted companies
performed worse than other companies over time, suggesting that short
sellers, like activists, were mostly correct in their assessments of
the firms.
Ivy Chief Investment Officer Peter Noris said in a statement
that activists and short sellers help keep markets strong by
encouraging best practices in corporate governance and get rewards for
leveraging undervalued information.
The results of the Ivy-Columbia Business School study echoed
another study last year by New York University's Stern School of
Business which found that activist hedge fund managers succeeded in
achieving their aims about 60% of the time Previous HedgeWorld Story.
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