CFA Institute Journal Review April 2018 Volume 48 Issue 4
Returns to Hedge Fund Activism: An International Study (Digest Summary)
The Review of Financial Studies
The ownership structure and institutional arrangements can affect activism activity. The average share stake held by activists across countries is 11%. Activists tend to seek the support of other institutional shareholders or engage with other activists. Engagements with outcomes (e.g., board changes) vary across countries and contribute significantly to activism returns. Japan, remains an exception.
How Is This Research Useful to Practitioners?
The authors provide evidence on the incidence, characteristics, and performance of activist engagements across 23 countries/territories in Asia, Europe, and North America. Activism’s largest market is the United States, but it is important in other countries as well. The authors find that activists tend to look for support from such investors as pension funds and other activists, given that each activist tends to hold, on average, only an 11% stake. Such coordination among hedge funds is referred to as the “wolf pack” phenomenon. The authors estimate that wolf packs are associated with nearly 25% of all engagements and generate the highest returns for shareholders.
Activist engagements tend to perform well; the authors find significant abnormal returns being reported (7.0% in the United States, 4.8% in Europe, and 6.4% in Asia). The probability of an activist being successful in achieving at least one engagement is 53%, but the incidence of outcomes varies significantly across markets. The authors find that Japan has high initial expectations but low activism-related outcomes. They also show that the incidence of engagement outcomes and the type of outcome have a major impact on abnormal returns over the engagement. Engagements with multiple outcomes (e.g., governance changes, restructurings) involving a takeover have abnormal returns of 18.1%, whereas those with only a takeover as the outcome have abnormal returns of 9.7%. Furthermore, the authors find that domestic activism tends to have better results than foreign activism.
Portfolio managers and investors in general will find the conclusions of this research useful. Activism can be expected to create value, but the magnitude of that value depends on the outcomes targeted. Engagements with multiple outcomes are expected, on average, to outperform. Takeovers preceded by other outcomes can be expected to create higher alpha for investors. Investors should also be cautious when investing in firms targeted by activists in Japan, given low observed outcomes.
How Did the Authors Conduct This Research?
The authors construct an international database of hedge fund activist engagements, which includes 23 countries/territories in Asia, Europe, and North America. Data are hand collected for Asia, Europe, and Canada; data for the United States come from 13D Monitor. The data include the initial disclosure date of the activist block, the block size, the identity, the activist’s country of origin, and the engagement completion date. The authors then gather data on the successful outcomes of each hedge fund activist engagement. Their final database includes 1,740 publicly disclosed hedge fund interventions in publicly traded firms taking place between January 2000 and December 2010.
These interventions are then analyzed. Engagements appear to be unevenly distributed across markets. The largest markets for shareholder activism are the United States (1,125 interventions), Japan (184 interventions), and the United Kingdom (165 interventions). Engagement characteristics vary across countries. Multiple activists may be involved in the same engagement (wolf packs), which is common in France, Germany, the Netherlands, Sweden, and the United States. Activists can be foreign hedge funds. In Germany (53 engagements), all activists are foreign hedge funds, with more than 50% coming from the United States. In the United States, activists are mainly domestic.
The authors find significant disparities in institutional ownership across markets. Median holdings can be as high as 77% of shares issued (in North America) and as low as 7% (in Asia). In further analyses, the authors find that the activist engagements without outcomes generally do not generate significant shareholder value. In contrast, those with outcomes create value for shareholders. In North America, activists achieve outcomes in 61% of all engagements. In Europe, the success rate is 50%, and in Asia, only 18%. Japan has high disclosure returns but very few outcomes. Interestingly, successful activism would imply doing more than stock picking—actually modifying the governance of the target company.
Many investors tend to underestimate the impact of hedge fund activism, which has become a global phenomenon. Some people regard hedge fund activism with suspicion on the grounds that it brings short-termism into corporate governance. Activists have an important role to play in the financial world. Although they generally need the support of other institutional shareholders, they facilitate alpha creation for investors in general and allow financial markets to be more efficient. The alpha created will ultimately depend on the activist achieving the outcomes.
I have concerns that the data used in the analysis cover a fairly short period (2000–2010) and that certain outcomes might have been influenced by the global financial crisis. Seeing whether the results would still apply over a longer (e.g., 25-year) period would be interesting. The authors’ findings are nonetheless thought provoking. Investors can potentially be expected to obtain abnormal returns in the case of takeovers preceded by governance changes.
The contribution of activists, therefore, remains significant, though it may not always be true in such markets as Japan. Furthermore, this study may be the first to look at the impact of activist engagements for a large number of companies in different markets.