(June 5, 2014) — Activist hedge funds have outperformed overall hedge fund benchmarks but recorded lower risk-adjusted returns due to high volatility, according to Preqin research.
The firm’s data—tracking more than 400 activist hedge funds with over $100 billion in total assets under management—revealed they returned an average of 11.82% in 2013, significantly higher than the 7.88% return from the benchmark.
“Hedge funds using shareholder activism as a method of investment have been a big talking point in the industry in recent years,” Amy Bensted, head of hedge funds products at Preqin, said. “As activism becomes a more widely utilized approach, fund managers are increasingly seeing viable opportunities for investment in this area.”
2013 saw the highest number of activist hedge fund launches since 2007 at 28 funds, more than double that of 2012 and 2011.
The comeback has been most recently highlighted by high-profile investors making aggressive moves, such as Third Point’s Founder Dan Loeb against auction house Sotheby’s.
“Increasingly, in the past year US-based activist hedge funds and their dealings have featured heavily in the financial press, frequently due to their hostile approach to the companies that they take stakes in,” the Preqin report said.
Despite activist funds’ recent outperformance and media presence, Preqin said these returns had come at the expense of greater volatility.Over the last five years funds exhibited volatility of 8-14%, compared to the industry average of 5-10%.
“This means that the returns of activist hedge funds fall short of the asset class as a whole when considered on a risk-adjusted basis,” the report said. Activist hedge funds’ three-year Sharpe ratio was 0.52 as of April 30, 2014, well below the overall hedge funds’ figure of 0.77.
Preqin also found activists’ performance was best in North America, posting an average return of 16.98% in the 12-month period ending April 30, 2014. The region was also the most established and concentrated location for activist investors with 66% of funds headquartered in the continent.
“It’s not surprising that a large proportion of activist hedge funds are based in North America, considering that activism against US-based firms has traditionally been a lot more prevalent than against companies based outside North America,” the report said. “Corporate activism is still fairly new throughout Europe and it appears that company directors are currently less receptive to activism.”
Foundations, pension funds, and fund of hedge funds managers accounted for 81% of investors with strong preferences for activist funds, the report found. For example, the $184 billion California State Teachers’ Retirement System, a firm supporter of activist hedge funds, recently invested $200 million in Legion Partners Asset Management in February.
“Activism remains a strategy to watch over the next few years,” the report said. “This reemergence of activist funds could be explained by activism becoming a more mainstream phenomenon, with more funds seeing opportunities by influencing corporate governance.”
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