It Can't Happen Here, Can It?
from January/February 2007
The dread that a hedge fund will muscle its way onto your board far outstrips the likelihood that this will actually happen—for now. Of 8,800 hedge funds plying assorted strategies, only about 100, according to Hedge Fund Research, are activists.
But that number is likely to grow. The funds are under increasing pressure from their own investors—institutions and individuals, each with a minimum of $1 million at stake—to pep up flagging performance. According to the Hennessee Hedge Fund Index, average annual return for the first nine months of 2006 was 6.3%. That’s down from 7.85% for all of 2005 and 13.7% on average for the years 1987 through 2005. Worse, it’s conspicuously less than the 8.5% nine-month return through September 2006 for the S&P 500 index. It’s hard to keep charging investors a 2% management fee and 20% of the profits, as most hedge funds do, when you’re producing such dismal results. This suggests that more funds will be turning into activists before too long.
Directors should recognize that hedge funds that launch proxy battles to elect their own board nominees usually succeed. Morgan Joseph & Co., a New York City investment bank, found that of 46 fights for board seats between January 2004 and March 2006, activists won 34.
