Hedge Fund Activism - What is it and How it Affects Shareholder ValuePosted by Klausen McCleary on June 12th, 2021 What is an activist investor and why should you care? agency is a private or institutional investor that aims to gain seats on the board of directors of a target organization by making significant, direct investments in the organization. Activist investors generally are interested in making substantial changes to the target organization and/or unlock unseen hidden value in the target organization. They are willing to take risks beyond the typical levels of investing which is not something you would typically hear from a standard, mainstream investment banker. Here are some of the characteristics of an activist investor as identified by Mary Schmucker in her article titled "What is an Activist Investor?" Mary states, "There are two key distinctions to take heed of: institutional investors that have years of experience and wisdom at their disposal and small-dollar individual investors that rely on intuitive judgment, a buck-book, spreadsheet software, and a phone." This is a very powerful distinction, since many investors (even the ones that call themselves institutional investors) fall into the second category. As stated earlier, these types of investors will typically put in the time and effort to perform due diligence on a company before they decide to invest. While many of these investors may not put in as much effort as Mary describes, this is still wise since you want to invest with an eye towards maximizing your profits. There is also a difference between what is known as "activist investing" versus "traditional" or "insider" investing. Traditional, public companies are generally considered safe since the shareholders typically own a majority of the stock. If agency of the owners decides to sell out and then the stock price drops most of the stock will be affected. As an example, there has been much discussion about activist investors pushing for Wal-mart to sell its stock because they are worried about the company's profit margins and the overall economic outlook for the business sector. There are specific activist investor strategies used by hedge funds and other professional investment groups. agency of these strategies include: Targeting companies that have a great deal of debt and/or debt management problems, which often come from high management fees and are difficult to turnaround. Another strategy is to target companies where there is significant risk to the current management, and where the potential for future financial trouble might be high. While there are many different types of activist investor strategies, one of the most popular is referred to as "activist shorting." This is when an activist group shortens the trading day of a particular stock to try and force a company to react to the pressure. In many cases, the goal is to get a company to move against the advice of the majority of their board. However, many companies, especially those that have a long history, will be hesitant to do this. As a result, an activists' group can push for a temporary short position, or "put bear" (sell short). "Activist" or "short" investment is not the only type of shorting available. Companies can also choose to shoot themselves in order to raise cash, or use other tactics such as going public in the hopes of obtaining enough investors to create a public offering. Some companies choose to go public in the hope of raising capital in the form of a bond issue. Companies that decide to take this route are required to follow certain rules. The Securities Exchange Commission works closely with Nasdaq to facilitate these types of offerings. One type of company that decides to short its stock on the Nasdaq is called a small-scale company. New York Stock Exchange, or the NYSE, handles all Nasdaq listings, as well as a number of stock exchanges throughout the world. Some of the companies listed on Nasdaq are international corporations, while others are US companies. As a result, there are hundreds of companies, both large and small, that are listed on both Nasdaq and NYSE. There have been a growing number of cases of what is called "hedge fund activism", which is when large groups of hedge funds take a short view of a particular company. What is the difference between what is commonly referred to as "activist" or "short" investing, versus institutional investors, and what is sometimes referred to as institutional investing, or value investing? Hedge funds typically do not have the same types of restrictions as institutional investors. One of the most notable differences is that hedge funds have no right of first refusal, unlike institutional investors. What is the difference between what is commonly referred to as "activist" or "short" investing, versus institutional investors, and what is sometimes referred to as institutional investing, or shareholder value investing?Like it? Share it! More by this author |