It shouldn’t come as too much of a surprise that hedge fund activists like Bill Ackman and Carl Icahn are talented stock pickers, they’ve made billions doing such things. But are they actually good at turning around companies?
This was the question at the center of “Hedge Fund Activists: Value Creators or Good Stock Pickers?,” a new paper authored by Martijn Cremers, dean of the University of Notre Dame’s business school; finance professor Erasmo Giambona of Syracuse University; University of Arizona law professor Simone Sepe; and Ye Wang, assistant professor at China’s University of International Business and Economics.
The study examined whether the investment gains earned by activist hedge funds are due to the companies actually being turned around or if they’re just good stock picks.
As it turns out, “activist hedge funds profit from superior stock selection and trading skills, not from turnaround planning that benefits the overall firm,” according to the paper.
The authors use the paper in an attempt to understand what really drives activist hedge fund performance. To do so, they analyzed over 15,000 Schedule 13D filings (2,684) and 13D amendments (12,549) that were filed between 1995 and 2016.
In the end, the study found: “We show that hedge fund activism is associated with positive abnormal stock returns in both the short term and the long term. Using matching procedures to mitigate selection effects, we find that activists’ targets do not outperform ex ante similar control firms; this suggests that activists are good stock pickers, not value creators. Activists also exhibit strong timing skills, generally selling (buying) stocks in targeted firms during periods in which these stocks outperform (under-perform) and ahead of negative (positive) abnormal returns. These selection skills do not seem to benefit the buy-and-hold shareholders of the targeted firms,” wrote the authors in the abstract.
The findings signal a change in how activist hedge funds should be viewed according to the authors: “[The findings] show that hedge funds exhibit both strong selection skills and strong trading skills… The fact that these skills do not seem to benefit other (particularly buy-and-hold) shareholders of targeted firms challenges the view that hedge fund activism adds long-term value to firms.”
