Top Hedge Funds and Shareholder Activism by SSRN

C. N. V. Krishnan

Case Western Reserve University – Department of Banking & Finance

Frank Partnoy

University of San Diego School of Law

Randall S. Thomas

Vanderbilt University – Law School; European Corporate Governance Institute (ECGI)

April 3, 2015

Vanderbilt Law and Economics Research Paper No. 15-9


Using a large data set of hand-collected information on recent hedge fund activist interventions through mid-2014, we find that both the number of hedge fund activists and their interventions have increased recently, and that, contrary to suggestions in the literature, the average announcement period abnormal stock returns continue to be positive. We also find that the returns to hedge fund activism vary in surprising ways. Strikingly, the frequency of interventions is not significantly associated with higher returns, but returns are significantly higher for hedge fund activists that make larger investments. These results hold even after controlling for selection bias. Based on these findings, we develop a hedge fund reputation measure for the “top hedge funds” derived from the size of a fund’s investments in the recent past. This reputation measure is superior to the alternative ones we examine. Top hedge funds differ from other hedge funds in important ways: they tend to have significantly higher assets under management, they are invested in more portfolio companies, they have a longer track record, and they have a history of holding board seats in target firms. The market appears to anticipate the superior performance of these top hedge funds even before announcement of intervention. Moreover, post-intervention target-firm operating performance associated with these top hedge funds is significantly superior to that of other hedge fund activists.

Top Hedge Funds And Shareholder Activism – Introduction

We examine recent hedge fund activism using a hand-collected dataset of 1,262 interventions by hedge fund activists from 2008 through mid-2014. We find that hedge fund activism continues to generate positive announcement–period abnormal stock returns, and that these returns vary significantly based on which hedge funds are involved. In particular, we find that hedge fund activists involved in the largest interventions in terms of aggregate market capitalization generate the largest abnormal returns, whereas hedge fund activists involved in more frequent, but smaller, interventions generate smaller returns. We create a new measure of hedge fund reputation based on these findings.

Our main findings are as follows. First, although Brav, Jiang, Partnoy and Thomas (2008) report a declining trend of returns year by year from 2001 through 2006, we find that this trend more recently has reversed: the announcement period abnormal stock price returns from hedge fund activism are consistently and robustly high from 2008 through 2014. For example, during the 21-day event window, the average announcement period abnormal stock price return for interventions during 2013 is around 9%, and for our entire sample is in the range of 6%. We find that these returns are slightly increasing during longer event windows, consistent with the earlier results reported by Brav, Jiang, Partnoy and Thomas (2008) and Bebchuk, Brav, and Jiang (2013). The average size of equity positions taken by hedge fund activists is in the range of 8%, consistent with previous studies.

Second, our sample illustrates how the market structure of the hedge fund activist industry has changed since the earlier time periods studied. For example, the industry has become larger and more dispersed, with both more participants and more targets.1 We find 578 different activist hedge funds in contrast to the 236 activist hedge funds analyzed in Brav, Jiang, Partnoy, and Thomas (2008). Moreover, no hedge fund activist in our sample has a substantial share of the market. Even those hedge fund activists with the largest numbers of interventions have relatively small market shares: the highest market share in terms of number of interventions is roughly 3%, and only a handful of activists have market shares of more than 1%. The industry market structure is somewhat more concentrated when interventions are measured based on the aggregate market capitalization of investments, but still only two firms each year have market shares in the range of 10% and the vast majority of firms’ market shares are below 1%. Based on the Herfindahl-Hirshman Index measures used by the Department of Justice to assess market concentration, the hedge fund activism industry would not be considered highly concentrated, or even moderately concentrated. Accordingly, any abnormal returns are not likely due to monopoly or oligopoly rents.

1 Indeed, since the end of 2009, the amount of money in activist hedge funds has jumped from $36 billion to $112 billion, according to Hedge Fund Research, reported in Fortune, December 22, 2014.

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