The game of ‘activist’ hedge funds: Cui bono?

This article aims to describe the contemporary objectives and tactics of activist hedge funds as well as the actions taken by the targeted companies as a result of their intervention. In this research, we explore the consequences of activism over time (impact on operational performance and share price returns) and compare these with a random sample of firms with similar characteristics at the time of intervention; we also analyse the singularities associated with salient sub-groups of targeted firms. The sample used for our research consists of all 259 firms targeted by activist hedge funds in 2010 and 2011. We found evidence that any improvements in operating performance (return on assets, return on equity, Tobin’s Q) result mainly from selling assets, cutting capital expenditures, buying back shares, reduce workforce and other basic financialmanoeuvres. Although there is no evidence of deterioration over a 3-year period, the stock’s performance of targeted companies over a 3-year span barely matches the performance of a random sample of companies.

We found that the best way for activists tomakemoney for their funds is to get the company sold off or substantial assets spun off. If not sold, the hedge fund episode often results for the targeted firms in change of senior management and board members, stagnation of assets and R&D. This research does not provide any evidence of the superior strategic sagacity of hedge fund managers, but does point to their keen understanding of what moves stock prices in the short term.