Activist Hedge Funds – guest post by Greg Marose
As the hedge fund industry exploded over the past fifteen years, it facilitated a new era of activist investing geared toward influencing corporate decision-making. Hedge fund activism, which many policymakers contend prioritizes profits over job creation and broader economic impact, is now finally emerging as a front-and-center issue inside the Beltway.
This past spring, Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) introduced legislation to enhance oversight of hedge funds employing activist strategies. The bill would shorten the Securities and Exchange Commission’s (SEC) Schedule 13D disclosure period and establish new rules around using derivatives to establish “net short” positions. The House Financial Services Committee also began exploring options to regulate proxy advisory firms that activists often rely on to advance their case during contested situations. This all comes as hedge fund managers increasingly find themselves being called to testify before congressional committees.
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The natural question to ask at this point is “why now?” Dating back to the 1980s, investment firms run by media-dubbed corporate raiders have been sparring with portfolio companies’ boards and management teams. More recently, a slew of emerging activist hedge funds began driving steady year-over-year upticks in proxy fights.
The reality is there are a number of factors that hedge funds employing event-driven strategies will need to consider now that they are in policymakers’ crosshairs.
First, regulatory focus is shifting away from the banking sector to the investment management space now that Dodd-Frank implementation is effectively on track. Large asset managers are already facing new SEC rules aimed at establishing enhanced liquidity standards and guardrails around derivatives use. Activist hedge funds will likely find themselves caught up in the broader push to clamp down on disclosure loopholes, short-selling and “short-termism.”
In addition, the current political and social climate does not bode well for hedge funds. Politicians on both sides of the aisle are shining a light on hedge fund managers that they believe embody Wall Street’s abusive tendencies. This was apparent during the introduction of the Brokaw Act and when lawmakers recently scrutinized hedge funds invested in distressed Puerto Rican bonds. Members of Congress—particularly those running for re-election during this unique year—are finding that this approach enables them to capitalize on constituents’ anger.
America’s leading business groups are also simultaneously increasing their own advocacy efforts geared toward reigning in the activists’ influence. The U.S. Chamber of Commerce led the 2015 push to launch the Corporate Governance Coalition for Investor Value, which aims to ensure “long-term value creation remains the foundation for managerial decision-making at American companies.” A number of corporate governance advocates, including the CEO of the Center for Executive Compensation, also recently testified before a House Sub-Committee about the need for proxy advisors to disclose their relationships with activist investors.
Clearly, activist hedge funds are facing a number reputational and political vulnerabilities. Their regulatory woes may increase in short order if the House of Representatives or Senate flip back to Democrats in November. This would empower potential committee chairs, like Senator Sherrod Brown (D-OH), to direct resources toward investigations and new inquiries into hedge fund activities.
One group of prominent activists recently formed a trade association to defend their turf and promote the merits of activism. The Council for Investor Rights and Corporate Accountability (CIRCA) is now working to remind policymakers that its members serve a valuable purpose by holding corporate management teams accountable and serving as stewards of capital for pensions, endowments and diversified investors.
Although the jury is still out on whether Washington can facilitate greater oversight of activist hedge funds, nobody can dispute that a policy battle is brewing. The industry will need to aggressively—yet tactfully—ramp up its advocacy, education and strategic communications efforts to counter headwinds picking up in the months to come.
About Greg Marose
Greg Marose is a Senior Account Supervisor in Edelman’s Financial Communications practice, focusing on a variety of legislative and regulatory matters impacting asset managers and capital markets participants.
Activist Hedge Funds