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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.