Activist hedge funds up by $8bn despite concern over risk
By Madison Marriage. This article originally appeared on the Financial Times website, FT.com on September 19th, 2014
Activist hedge funds, which agitate for corporate change, have seen their asset base grow by $8bn this year, despite rising concern about performance prospects and the quality of new funds in the sector.
Investors poured $5.6bn into activist hedge funds in the first six months of the year, according to figures from Eurekahedge, the data provider.
Activist managers, which include Pershing Square’s Bill Ackman and Third Point’s Dan Loeb, have also recorded average performance gains of 2.9 per cent to the end of July, leading to an additional asset increase of $2.3bn.
This means that total assets in the activist sector have increased 9 per cent this year alone to $96bn.
The data provider warned, however, that investors need to take into account that the risk profile of these funds is usually twice that of the average hedge fund, with annualised standard deviation of 10.2 per cent.
“While activist hedge funds with their concentrated portfolios and diligently executed campaigns can be a great source of alpha for investors, their high volatility and susceptibility to drawdowns during extreme events should be kept in perspective too,” the data provider said.
Troy Gayeski, partner at fund of hedge fund company SkyBridge Capital, which invests in several large activist funds, agreed investors might not have enough awareness of the sector’s high risk and return dynamics and probable weakening in performance.
He said: “Some investors could be inaccurately extrapolating the performance success of 2013 and early 2014 when both the macro and micro [environments] were arguably the best they have ever been.
“Investors have to understand that the absolute returns will be far lower going forward and activists’ volatility will be higher, as you’ve seen the past few months.”
The surge of money into the strategy has also prompted concern about managers with little experience of activism exploiting the ‘activist’ label to attract investors. Anne-Gaelle Pouille, senior portfolio manager at fund of hedge fund company Paamco, agreed that the so-called ‘style drift’ of some event-driven fund managers towards activism is misleading. Event-driven funds attempt to make gains before and after corporate events.
She said: “Successful activism requires staying power, relationships, credibility and business skills that are built over time; hedge fund managers should demonstrate a track record before allocating investor funds to that sub-strategy.”
But Mr Gayeski played down fears about misuse of the activism label. “There have always been and will always be those who claim an ability in order to beguile investors when in fact they do not,” he said.
“[But] compared to the last cycle from 2005 to 2007, we have seen fewer managers claim to be successful at prodding management teams when in fact they are just cheerleaders for the heavy lifting done by those who have a rich history of success.”
About New York Institute of Finance
With a history dating back more than 90 years, the New York Institute of Finance is a global leader in training for the financial services and related industries with course topics covering investment banking, securities, retirement income planning, insurance, mutual funds, financial planning, finance and accounting, and lending. The New York Institute of Finance has a faculty of industry leaders and offers a range of program delivery options including self-study, online and in classroom.
For more information on the New York Institute of Finance, visit the homepage or view in-person and online finance courses below: