What Is an Activist Hedge Fund?

An activist hedge fund is a fund that becomes a major shareholder in a company, for the purpose of exerting pressure on the board of directors. A major shareholder is an investor with an ownership amount that is greater than five percent in a company. When an individual or institution controls this large a block of shares, the shareholder is able to provide an agenda with the management of the company. The purpose of this agenda, particularly when an activist hedge fund is involved, is to bring about a change capable of having a positive impact on the stock's near-term price.

Activist Investing

The term gets its name from the active role the activist investor takes. It is meant to contrast that role from the typical investor. A typical investor may vote his or her shares, and may attend the shareholders’ meeting, but is rarely public or vocal about his beliefs. In order for these public opinions to receive coverage, and thus carry any weight, the investor in question must own a substantial enough block of shares that would be influential.

Activist investing is most commonly associated with individual high net worth investors. With this approach, you take a major position in a company with the aim of exerting public pressure on the company’s management. While in most cases the objective is financial, there are cases of activist investing to achieve non-financial goals. These include such intentions as to convince a company to stop doing business in a particular part of the world, or to make environmental changes to the way the company executes its corporate policies.

Activist investing is an attractive way to impact a corporation’s direction because you do not need to fully acquire the company. On a relative basis, it is a more direct and less expensive way for you to exert influence over management. Gaining control over as little as five percent of the outstanding shares is frequently sufficient to accomplish your goal.

An Activist Hedge Fund

Like an individual activist investor, an activist hedge fund attempts to use its position as a major shareholder to publically influence management. Some of these funds are owned and run by activist individual investors. Carl Icahn, for example, has taken a major role in many companies. One of his more recent deals involved the ousting of Jerry Yang at Yahoo. Much of his activity is run through his fund, the Icahn Management LP. Believing that Jerry Yang was responsible for Yahoo’s failing to accept Microsoft’s acquisition offer, Icahn used his influence to vote Yang out of the company.

The common criticism of activist hedge funds is that the influence they exercise is unfair. Unless you have significant capital, you cannot hope to yield this type of power over a typical corporation. While every shareholder has a vote, small investors are often unable to have an impact. The concern is that these large investors may act for their own betterment and to the detriment of small investors.

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