New research shows activist hedge funds are more popular than ever, with assets under management and returns both at all time highs. But a little discussed risk exists.
Activist investor portfolio track totals $176 billion
Soon to be published research from Novus, the New York City-based research that monitors hedge fund positions, points out the aggregate activist portfolio they track totals $176 billion as of June of 2014, totaling 9.3 percent of total hedge fund assets. This compares to 3.9 percent of hedge fund assets controlled by activists in 2004, Novus says. ValueWalk reviewed the study prior to its public release.
But most important are the returns. Novus notes that a portfolio comprised of publicly disclosed longs by activists outperforms both the broad markets and the aggregate hedge fund universe historically as well as during the current market cycle.
Since 2005, activists have outperformed the general stock market during every time period studied, and outperformed general hedge fund investor in all but one point during 2009. The cumulative return for activists studied during from 2005 was 267 percent, while the S&P 500 (INDEXSP:.INX) was up 115 percent and the HFRI Composite Index, measuring hedge fund performance, was up 73 percent.
Activist investor getting a lot of attention
In the research, Novus notes that activist investors have been getting a lot of press, which is contrary to hedge funds often secretive behavior. In fact, activist hedge funds actually rely on media to amplify their claims, help influence public opinion and in turn drive profits on their positions, the report says. “The attention has been well-deserved as of late as many campaigns have been successful in bringing about change in target companies, not to mention tidy profits for activists and their clients,” Novus writes.
But there is a risk to this investing type. The recent trend to favor activist investing has taken place during a persistent bull market. “Risks do exist in this strategy, the main one being significant illiquidity,” Novus Chief Research Officer Stanley Altshuller. The reason illiquidity can pose a serious risk, he points out, is that during market corrections managers tied up in their names are subject to violent swings without the ability to quickly exit their positions.
So when following activists, don’t think that this – or any investing strategy, including bonds – is “riskless.”