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Hedge fund year in review

2013-4

No better time than the present (even if it’s already March) for a review of the year that was in the world of hedge fund media.  Three story lines were recurring and continue to be extremely relevant this year:  activist funds taking on “big game” in the form of global corporations; whether or not “real money” asset managers will stay on the sidelines or join forces with activists; and, the ongoing saga involving Herbalife.

Trend #1:  2013 was the year that activist funds upped the ante and consistently turned up the heat on global corporations.  Hess, Apple, Sony, and Pepsi were/are targets of a who’s who of activist investing:  Elliott Management, Greenlight Capital, Third Point, and Trian, respectively.  Elliott won board seats at Hess, Apple started a share buyback plan and increased its dividend, Third Point has lost money on Sony buy continues to call for the company to make “difficult decisions” and spin off parts of the company, and Trian is still arguing for Pepsi to spin off its beverage business and bulk up in snack foods.  Not a bad track record, given size of these corporations.

Expect more of this big game hunting by activist funds.  Indeed, investment banks and the largest law firms are increasingly advising corporate clients on how to cope with, and better yet, avert activist attention.  It remains to be seen how corporations can begin to think like an activist (in attempts to avoid being targeted).  If they do, it should result in higher profits, sharper strategy and better governance.  According to a Conference Board Report, as of September 2013, hedge funds were “somewhat victorious” in 19 of 24 proxy contests initiated to that point last year, suggesting that shareholders are also starting to think like an activist.

Trend #2:  Pension funds and other traditional asset managers are beginning to engage more with corporate boards and activists.  Called “sleeping giants” by this blog, pension funds are where the muscle is.  The enduring question is do they have the stomach to advocate forcefully for change aimed and boosting share prices.  Calpers and Calstrs have long focused on good corporate governance and evidence is mounting that other pension funds are ready to be more proactive with corporate boards.  Nell Minow, the co-founder of the governance advisory firm GMI Ratings, says there has been “a shift in tactics” among big pension funds “from shareholder proposals to engagement and director replacement.”

The newly-formed Shareholder-Director Exchange is a group comprised of corporations and asset mangers that  developed a “protocol” for institutional investors and board members to follow when either side wants to talk to the other.  While the SDX operates within the traditional realm of corporation-shareholder relations, pension funds want more engagement and presumably more accountability from boards.  Activists are not part of the SDX, but if I were an activist, I would view this as promising for my strategies (more on this next time).

Trend #3:  What is going on with Herbalife?  Herbalife was the biggest headline getter in 2013 and it produced an almost a non-stop series of tabloid quality story lines that included the likes of Pershing Square, George Soros, Third Point, Perry Capital and others.  The saga continues and now the government is investigating Herbalife (chalk one up for Pershing Square).  Net net, no one really knows what’s the deal with Herbalife.  The longs won out in 2013, but it’s a new year.

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