Abstract. This article reviews shareholder activism by hedge funds. We first describe the nature and characteristics of hedge fund activism, including the objectives, tactics, and choices of target companies. We then analyze possible value creation brought about by activist hedge funds, both for shareholders in the target companies and for investors in the hedge funds. The evidence generally supports the view that hedge fund activism creates value for shareholders by effectively influencing the governance, capital structure decisions, and operating performance of target firms.
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6.3. Cross-sectional Variation in Return to Hedge Fund Activism
Only few papers provide evidence on the cross-sectional variation in the return of activist hedge funds. Based on regression results in which the dependent variables are four- and one51 factor alphas, Brav et al. (2008b) show that most of independent variables related to the style of activism and the characteristics of funds are insignificant except that high fees tend to be charged by funds that deliver better performance. These results indicate that fund performance is very difficult to predict from observed characteristics, consistent with the theoretical work (Berk and Green (2004)) and empirical evidence (Liang (2001)) in the literature. In addition, Boyson and Mooradian (2007) try to relate the performance of activist hedge funds with activism strategies. Their evidence suggests that activist hedge funds that pursue aggressive activism, particularly corporate governance changes, tend to earn higher risk-adjusted returns than those focusing on the undervaluation of the target assets (i.e., passive activism).
7. Conclusion
This review serves as a comprehensive survey of research on hedge fund activism, a new phenomenon that has emerged during the past decade and has been widespread across sectors and multiple countries. We review activists’ objectives, tactics, and choices of target companies. We then analyze value creation brought about by activist hedge funds, both for shareholders in the target companies and for investors in the hedge funds, and distinguish the value effect from alternative hypotheses such as stock picking and wealth transfer. The multitude of evidence from different studies generally supports the view that hedge fund activism creates value for shareholders by effectively influencing the governance, capital structure decisions, and operating performance of target firms.
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