The aggressive activist hedge fund trend is only growing and becoming bolder, notes an interesting new study posted on the Harvard Law School website, by Richard Lee Jason D. Schloetzer of The Conference Board. The study in particular considers the antics of Bill Ackman and Carl Icahn, noting their successes and failures and musing regarding the various tactics activists employ. The study looks at Motorola Solutions Inc (NYSE:MSI) (2007-2011), Yahoo! Inc. (NASDAQ:YHOO) (2008-2010), Netflix, Inc. (NASDAQ:NFLX) (2012-present), Dell Inc. (2013), Apple Inc. (NASDAQ:AAPL) (2013-present), eBay Inc (NASDAQ:EBAY) (2014-present) for Carl Icahn; MBIA Inc. (NYSE:MBI) (2002-2008), Target Corporation (NYSE:TGT) (2007-2011), J.C. Penney Company, Inc. (NYSE:JCP) (2010-2013), Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) (2011-present), Air Products & Chemicals, Inc. (NYSE:APD) (2013-present), Herbalife Ltd. (NYSE:HLF)  (2012-present), and Allergan, Inc. (NYSE:AGN) (2014-current) for Bill Ackman.

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Companies most at risk from an activist hedge fund strike

Activist hedge fund managers commonly seek to replace the board of directors, management of the firm and initiate new corporate policies – and the hedge funds typically have their way in the corporate board room.  A particularly important tactic used is to bring an issue to a vote at the target company’s annual shareholder meeting.

The report noted that in 2013 hedge funds claimed victory in nearly 80 percent of their contests, winning either total or partial victories.  During the year the activists submitted 24 shareholder proposals and hedge funds waged the majority of proxy battles, responsible for 24 of the 35 contests at Russell 3000 companies.

What type of company is most at risk?  According to the report, failure to establish a clear corporate strategy, failure to replace a failing CEO in a timely fashion, companies that have the ability to distribute cash to shareholders through dividends and shareholder repurchase programs and firms that can generate cash through divesture of non-core assets are likely targets, made more likely when the board of directors is “entrenched.”

Does activism create value?

While activists are documented to have their way with corporate boards, does this create value for shareholders?  It all depends.

The report noted the share price of a stock from the point that an activist hedge fund manager typically increased by 7 percent from the point the fund filed a 13D report with the SEC, which indicated their activist intentions. Interestingly, the return can vary depending on what the activist’s demands.

Activism that focuses on the sale of the company or spinning off non-core assets generated the highest returns, along with pushes to change or re-focus business strategy. Activist strategies said not to add as much value included attempts to curtail CEO compensation, enhance board independence, debt restructuring or resending takeover defenses to oust the CEO, for example.

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A growth industry

Activist hedge fund strategies are being integrated into traditional strategies at a brisk clip, and assets are rising faster than any other strategy.

Citing a study by eVestment, the report noted a seven-fold increase in assets under management at activist hedge fund, growing from $23 billion in 2002 to nearly $166 billion in early 2014. “The momentum continues, with total new capital inflows into activist funds reaching $6 billion in the first quarter of 2014, which represents approximately 30 percent of all inflows into event driven funds,” the report noted. Activism is also among the best-performing primary fund strategies, posting returns of nearly 10 percent since October 2013 and 18 percent for the year.

It is these rising asset flows and “increasingly bold activism have contributed to the business press identifying activist hedge funds as the “new sheriffs of the boardroom,” the report said. The question is how many activist hedge funds can the stock market really support before it becomes an over-saturated strategy?