Hedge fund activism works – for now

William Wright and William Hutchings
04 Jun 2007

Hedge fund activism generates big returns for shareholders – but these returns are falling as more funds chase fewer attractive targets, according to the most comprehensive academic study yet produced.
Shares in companies targeted by activist hedge funds in the US outperformed the market by more than 7% in the short-term, and targeted companies posted significant improvements in operational performance and return on equity in the two years after hedge funds called for change, according to the study of nearly 900 interventions by more than 130 different hedge funds in the US between 2001 and 2005.
In a quarter of all cases the excess returns were higher than 17%. The study, published last week by the Wharton School at the University of Pennsylvania and written by four academics, also shows that hedge fund activists have a bigger impact on share price performance than traditional activism by pensions funds or mutual funds.