Experienced Hedge Fund Activists

Abstract:     
Using a sample of 269 activist events from 1994 to 2005, we show that targets of experienced hedge fund activists earn higher long-term stock returns than targets of less experienced activists or a matched target sample. Hedge fund expertise includes past industry experience in the hedge fund’s industry of specialization or prior portfolio management/ leadership experience at similar hedge funds. Experienced activists also boast better overall hedge fund performance. Investigating the sources of performance, we find that more experienced activists follow a well defined course of action by initially putting the target firm “on notice” that the hedge fund may become more aggressive. If target firm performance does not improve quickly, these activists typically turn hostile by initiating and often winning proxy fights, making proxy threats, forcing targets to sign standstill agreements, and/or agitating for and frequently getting the sale of the target firm. Importantly, ours is the first study to document large-scale evidence that hedge fund activism can lead to superior long-term target firm and hedge fund performance and to document the source of this outperformance. These results provide compelling evidence of skill among certain hedge fund managers – those with the experience and expertise to engage in activism.

Number of Pages in PDF File: 46

Keywords: Hedge Funds, Activism, Corporate Governance, Reputation

JEL Classification: G29, G34

working papers series