Activist hedgies do not deserve their reputation as “big, bad wolves”, according to a new report which argues that the controversial industry is looking for more than a quick buck.
A group of researchers have said this morning that there is no evidence of hedge fund activists being corporate raiders, hitting back at claims that they act as self-serving asset-strippers.
Pushing for changes at companies, hedge fund activists often come under criticism after ousting company directors or calling for the sale of non-core assets.
However, hedge funds are the only type of activists who have a positive long-term impact on businesses, the study led by Durham University Business School has found, prompting the report to identify them as “shepherds and not wolves”.
The findings suggest that hedge fund activists are often mistakenly associated with mergers and acquisitions, “which focus on the short-term and ignore the long-term game”.
“Hedge fund activists had always been depicted as big, bad wolves who come into firms, asset strip them, and sell them for profits to fill their own pockets, but our research shows that this is not actually the case,” said professor Michael Guo.
He added: “In fact, these activists have the ability to streamline firm practices, make organisations much more efficient, and sell off any dead wood in the organisation, thus creating a positive turnover for the company.”
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The findings come amid mounting pressure of hedge funds, which have faced growing calls for regulation and scrutiny amid claims that they often pursue short-term stock returns at the expense of long-term value creation.
Guo said that the research proved “these activists are able to give an external, expert opinion on which parts of the business are performing well, fit for purpose and worth investing in still, whilst also identifying problem areas for the firm, and implementing a resolution to these”.
The researchers reviewed a comprehensive dataset of 358 US divestitures initiated by shareholder activists from the years 1994-2016.
A recent study from Alvarez and Marsal (A&M) has forecasted the European market for activism will grow next year, with 158 European companies are at risk, up from 150 in April.
In the last year a number of prominent UK stocks have become activist targets, including plumbing supplier Ferguson and Domino’s Pizza.
While UK is still the largest market for activism (54 companies at risk), the UK’s dominance is eroding as other key European markets such as France and Germany accelerate.