Investor activism has gained mainstream acceptance as activists with larger-than-life personas have waged a string of successful campaigns. Activist hedge funds’ assets under management (AUM) have swelled to $120 billion, an increase of $30 billion in 2014 alone. It was among the best performing hedge fund strategies in 2014 as well as over the last three- and five-year periods. In this report, we explore an investment strategy that looks to ride the momentum surrounding the announcement of investor activism. We further explore what, if any, changes to targeted companies activists are able to influence.
Report highlights include:
- A capitalization-weighted strategy of investing in targeted firms upon the filing of a Schedule 13D and held for one month outperformed the market and the targets’ control group by 2.64% and 1.75%, respectively, with significance at the 1% level.
- A capitalization-weighted monthly rebalancing strategy of investing in targets by looking back 24 months to form portfolios produced an annualized outperformance of 8.16% after controlling for common drivers of equity returns with significance at the 1% level.
- Relative to their peers, pre-activism, targets typically (i) underperformed (ii) had slower YoY revenue growth (iii) had lower total capital return yield (iv) were more profitable (v) and had similar levels of operating efficiency.
- Two years post-activism, financial characteristics of targeted firms did not show improvement but targets’ total capital return yield and financial leverage were higher.