The latest Hedge Fund Trend Monitor from Goldman Sachs analysts Amanda Sneider, David J Kostin, Stuart Kaisar, Ben Snider, Rima Reddy and Aaron Woodside carries a section on activist hedge funds.
As this is written, we learn of one of the most successful and speedily conducted activism campaigns in recent times – that of Juniper Networks, Inc. (NYSE:JNPR) by hedge funds Elliott Management and Jana Partners. Juniper capitulated by offering a $3B buyback, quarterly dividends, improvement in operating margins and two new board positions for independent directors. Juniper is trading at $28.08, up 2.44%.
In contrast, another highly successful activist campaign by Bill Ackman’s Pershing Square fund took a few years to realise the bumper gains Ackman had envisioned. Last month, a Japanese drink-maker acquired BEAM Inc (NYSE:BEAM), in which Pershing had a sizable holding, for $16B, netting the fund hundreds of millions of dollars in profits.
It is an appropriate time therefore, to catch up on the recent trends in hedge fund activism as highlighted in the research note by Goldman Sachs.
Activist hedge funds outperform equity hedge funds by far
“Activist funds have returned 40% during the past two years vs. 23% for the typical equity hedge fund. More than 25 activist campaigns have been launched YTD,” point out the analysts.
Indeed, stocks of activist targeted companies have been outperforming their Russell 3000 sector in recent years. Though the median activist –targeted stock underperformed the sector during 2007 through 2009, the tables turned during the subsequent years when such stocks outperformed by 100-350 bps, as seen in the chart below.
This outperformance by stocks naturally percolated to superior performance by the hedge funds driving the campaign.
The analysts observe that during 2012, the HFR Activist Index gained 21% compared to a rise of only 7% in the HFR Equity Hedge Index.
During 2013, the HFR Activist Index was up 16% compared to 14% for the Equity Hedge Index.
Activist hedge funds campaign trends
Citi observes that there is a rising trend in the number of activist campaigns announced by investors after 2009, as shown in the following chart. Notably, these levels are still well below the numbers seen in 2007 and 2008.
Hedge funds were responsible for the lion’s share (64%) of the aggregate number of campaigns launched during the period 2005-2013, as shown in the chart below which breaks down campaigns by investor type.
During 2013, the share of hedge funds in activist campaigns rose to 75%, say the analysts.
During 2013, the primary objective in 43% of the activism campaigns was to enhance/maximize value for shareholders, followed by board representation (34%) and board control (14%).
Larger companies facing the brunt of activism
“Historically, Russell 1000 firms accounted for 32% of activism in the Russell 3000, in line with its share of stocks in the index (34%, 1013/3008). But in 2013, constituents of the Russell 1000 accounted for 38% of campaigns,” observe the analysts.
It appears therefore, that activism on larger companies is on the rise.
Advice for non-activist shareholders
“As the number of activist campaigns and the size of targeted stocks grow, non-activist investors should focus on the ability of targeted stocks to sustain returns following a campaign announcement,” suggest Goldman Sachs.