Hedge fund firms that push companies to sell themselves or change their strategies boost investor returns by as much as 7%, according to a study.
So-called activist hedge funds generate returns that are 5-7% higher than benchmarks, according to the study released on Tuesday by New York-based Ivy Asset Management Corp. and Columbia Business School. The report analysed 781 instances of hedge fund activism between 2001 and 2005. Ivy Asset is the hedge fund unit of The Bank of New York Co.
Hedge fund investors such as Carl Icahn and Steven Cohen’s SAC Capital Advisers LLC have pushed the largest US companies to boost their share prices by using their status as shareholders to press for changes.
Shares of TD Ameritrade Holding Corp. rose 13% in the past month as Cohen urged the online broker to merge with a rival. Icahn helped Time Warner Inc. increase its share price by 25% last year.
The study found that “the influence of activist activities is not temporary in nature and often leads to improved operational performance at target firms”.
Hedge funds that use activist strategies are successful in achieving their stated goals about two-thirds of the time, according to the survey.
Companies that underwent mergers or spinoffs of business units had the best market performance, while those that restructured debt and ousted the chief executive officer had the worst performance.
Ivy Asset and Columbia Business School also found that returns on stocks with “relatively heavily shorting” trailed “lightly shorted” shares in a given week by an average of 1.16% in the 20 days following a trade, according to a separate study.
“Overall, the results indicate that institutional short-sellers have identified and acted on important value-relevant information that has not yet been impounded into price,” the second survey said.
A successful short sale involves selling borrowed shares and buying them back at a lower price, pocketing the difference. Short sales accounted for 13% of the trading volume on the New York Stock Exchange from 2000 to 2004, according to the study. BLOOMBERG