The solutions usually involve replacing Board members or executives, divesting assets, changing the capital structure, cutting costs, adopting new strategies, and sometimes selling the entire company.Įlliott’s presentation to Suncor after they announced a 3.4% stake in the company has a good example of this structure (click the image for a larger version): “ESG” – Everyone is going to die from climate change, and this company is the equivalent of Thanos because it doesn’t disclose its carbon emissions or it deviates from the doctrines of the Church of ESG.Undervalued or Misunderstood Assets – One specific division is poorly run and could perform better as an independent entity the market is penalizing the entire company’s valuation due to this one division dragging down everything else.Corporate Governance and Management – Management is still earning total compensation in-line with teams at better-performing companies, and the Board is filled with sycophantic “insiders” who keep increasing their compensation despite shareholder complaints.Its share price has also been stagnant, while peer companies are up 20-30% over the past few years. Operational Underperformance – For example, peer companies have generated Return on Invested Capital (ROIC) figures of 10-15%, but this company is lagging behind at 5%, which is well below its WACC.The problem could be almost anything, but it’s usually related to: Contact other shareholders and Board members and begin a persuasion campaign to win Board seats at the company and implement the proposed solutions.Release a presentation with the company’s problem(s) and the hedge fund’s proposed solution(s).– use the filing as an opportunity to announce their position and start their public campaign. Once the stake reaches 5% – which requires disclosure via a 13-D filing in the U.S.Start accumulating a small stake in a public company’s equity.Long/short equity and credit hedge funds look for mispriced securities with potential catalysts that might change their market prices.īut activist hedge funds create their own catalysts by winning ownership and influence and persuading others to enact the changes they want to see. The main downside is that you might have to clarify what type of “activist” you are – so that you don’t get mobbed by an angry crowd burning down buildings or sociopaths screaming at each other on Twitter: What is an Activist Hedge Fund?Īctivist Hedge Fund Definition: An activist hedge fund accumulates sizable stakes in companies to gain operational/financial influence and persuades Boards and management teams to enact their desired changes they profit based on increases in companies’ stock prices after these changes take place.Īctivist hedge funds are usually classified as “event-driven” within hedge fund strategies, and for good reason. If you can win an offer at an activist fund, you’ll arguably get some of the most interesting work in the industry.

Similar to private equity firms, they operate on longer time frames, influence companies’ operations and finances, and might catalyze major changes, such as spin-offs or acquisitions.Īnd similar to long/short equity hedge funds, they target undervalued and misunderstood companies and profit when the rest of the market catches up. If you’re thinking about exit opportunities and can’t decide between private equity and hedge funds, activist hedge funds might be your solution.

Hedge funds meaning