Top Hedge Funds and Shareholder Activism
Abstract
Using a large dataset of hand-collected information [captured from Hedge Fund Solutions' research on activist investments] on recent hedge fund activist interventions through mid-2014, we find that both the number of hedge fund activists and their interventions have increased recently, and that, contrary to suggestions in the literature, the average announcement period abnormal stock returns continue to be positive. We also find that the returns to hedge fund activism vary in surprising ways. Strikingly, the frequency of interventions is not significantly associated with higher returns, but returns are significantly higher for hedge fund activists that make larger investments. These results hold even after controlling for selection bias. Based on these findings, we develop a hedge fund reputation measure for the “top hedge funds” derived from the size of a fund’s investments in the recent past. This reputation measure is superior to the alternative ones we examine. Top hedge funds differ from other hedge funds in important ways: they tend to have significantly higher assets under management, they are invested in more portfolio companies, they have a longer track record, and they have a history of holding board seats in target firms. The market appears to anticipate the superior performance of these top hedge funds even before announcement of intervention. Moreover, post-intervention target-firm operating performance associated with these top hedge funds is significantly superior to that of other hedge fund activists.
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