Investors Pull Back from Activist Hedge Funds
By Rachael Levy December 23, 2015
Investors are pulling back from investing in activist hedge funds as rocky performance has some top funds facing their worst years ever.
It’s a far cry from last year, when investors poured capital into activist hedge funds, expecting outsized returns from the strategy that tries to leverage a strategic amount of public company shares into influence over corporate decisions. Activist funds pulled in $7.8 billion through the third quarter this year, about half of what the segment gained all of last year – $14.2 billion – when the average strategy returned 6.57%, according to HFR, an industry data tracker.
The lighter inflows coincide with tough times at big shops such at Pershing Square Capital Management.
“If the year finishes with our portfolio holdings at or around current values, 2015 will be the worst performance year in Pershing Square’s history, even worse than 2008 during the financial crisis,” Bill Ackman wrote earlier this month to investors in the publicly traded Pershing Square Holdings.
Nelson Peltz’s Trian Partners activist fund and Dan Loeb’s Third Point fund also suffered setbacks earlier this year, according to news reports.
The big-name stumbles don’t reflect performance of the broader activist segment, which has grown steadily from 57 hedge funds in 2007 to 76 today. HFR’s activist index posted gains of 2.25% in November and is up 3.31% for the year, beating the overall hedge fund index, which gained 0.45% in November and is up 0.32% for the year.
But the segment’s results are still nothing to gush over; activists’ returns measured by the index so far this year are the worst since 2011.
They pale especially compared to 2012 and 2013, strong years for activist managers, when the average strategy returned 20.9% and 16.1%, respectively, says Ken Heinz, CEO of HFR. That helped drive a lot of interest in activist funds last year.
“It was kind of front and center on everyone’s wish list of exposures to add to their portfolio,” he says. “That certainly drove [asset flow] gains in 2014.”
However, 2015’s hiccups, particularly in the third quarter, don’t mean activist funds will fade into the background. Investors are still likely to allocate to activist managers, Heinz says.
“I don’t think 2015 has been a year that would discourage investors that truly understand the nature of the strategy and the fact that one invests in activist funds for a long-duration type of commitment,” he says.
Indeed, institutional investors tend to look at activist funds as longer-term investments, potentially with a three-year outlook, says investment consultant Chris Cutler,CEO at Manager Analysis Services.
The activist manager segment is also benefiting from moves that make the strategy more competitive with private equity firms, which also sometimes seek control over public companies. Some activist fund managers have developed their investment strategies after spending significant time learning at private equity shops.
“The thing that investors like about us is that we have real operating business experience as private equity real estate owners first,” says Josh Zamir, founder of Capstone Equities, a distressed debt and real estate firm that uses shareholder activist tactics. “We understand how you can turn around a bunch of assets.”
Earlier this month, Capstone became the first foreign investor to take advantage of new Spanish bankruptcy laws by completing a large corporate restructuring.
The activist/private equity paradigm shift also appears in other ways.
And some investors have added money to activist funds after deciding that private equity was saturated with capital, says Tom Kreitler, partner at capital raiser Eaton Partners.
“It’s a combination of people hoping that managers in an activist strategy could generate alpha without needing equity market beta, as well as an understanding that someone who is good at it uses a private equity approach,” he says. “And there’s probably a greater opportunity set in the public space.”
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