The Case For And Against Activist Hedge Funds

Activist hedge funds can count on a number of supporters in academia and in the media rising up in defense of their actions. No doubt activist hedge funds have found their most persistent academic supporters in Professor Lucian Bebchuk of the Harvard Law School and his co-authors. In several papers, but most particularly in the Bebchuk, Brav and Jiang (2013) paper, the authors make several claims, which are summarized in Bebchuk’s op-ed piece in the Wall Street Journal:

“Our comprehensive analysis examines a universe of about 2,000 hedge fund interventions during the period of 1994-2007 and tracks companies for five years following an activist’s arrival. We find that:

• During the five-year period following activist interventions, operating performance relative to peers improves consistently through the end of the period;
• The initial stock price spike following the arrival of activists is not reversed in the long term, as opponents assert, and does not fail to reflect the long-term consequences of activism;
• The long-term effects of hedge fund activism are positive even when one focuses on the types of activism that are most resisted and criticized – first, those that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing capital expenditures; and second, adversarial interventions employing hostile tactics;
• The “pump-and-dump” claim that activists bail out before negative stock returns arrive is not supported by the data; and
• Contrary to opponents’ beliefs, companies targeted by activists in the years preceding the financial crisis were not made more vulnerable to the subsequent downturn.”
  (Wall Street Journal, August 8th, 2013).

Read more