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Activist Hedge Funds on a Roll, Returning 50% in 2012–'14

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U.S. hedge fund managers such as Daniel Loeb at Third Point Management, Barry Rosenstein of Jana Partners and William Ackman of Pershing Square have become boldface names in the hedge fund sector in recent years.

Their funds are among the most prominent of some165 activist hedge funds in the world today, which collectively manage approximately $120 billion, according to a new paper by the Alternative Investment Management Association.

The larger hedge fund universe is currently awash in $3 trillion in assets and counting.

Activist hedge fund assets have increased six-fold in the last 10 years as these funds have bought shares in companies and sought to whip them into shape by improving corporate governance, changing strategy and improving capital efficiency.

Activist funds generated compound annualized returns of more than 50% from 2012 to 2014, AIMA reported.

The paper was produced in conjunction with the London law firm Simmons & Simmons.

It said two-thirds of activist hedge funds were located in the U.S., 15% in Europe and 14% in Asia.

The paper’s research found that hedge funds’ activist engagement was positively correlated to improvements in the share price and operating performance of targeted companies.

Activist hedge funds seek higher standards of corporate governance from the companies in which they invest, and this, the paper said, improved alignment of interest between management, shareholders and other stakeholders.

Involvement by activist hedge funds led to a 25% improvement on average in the share price of targeted companies two years after an exit.

According to the paper, activist hedge funds’ average holding period is about two years, compared with the equities market average of three months.

And contrary to popular belief, the paper said, most engagement by activist hedge funds is collaborative and constructive.

“Activist hedge funds are bringing improvements to the efficient allocation of capital and resources in the economy overall, which is one of the key benefits of capital markets financing as opposed to bank financing,” AIMA chief executive officer Jack Inglis said in a statement.

— Check out CTAs Star in Bleak January for Hedge Fund Performance on ThinkAdvisor.