This paper investigates ‘activist investing’ as adopted by some institutional investors and hedge funds, and explores the resulting impact on the decision-making and corporate governance processes of the companies in which they invest. Firstly, it suggests that although activist investing has become something of a fad and its benefit to firm performance is still disputed, investors’ attitudes have changed and acceptance of the strategy is growing. Secondly, it posits that hedge funds, in keeping with their respective financial size and available resources will continue to apply this strategy with three key objectives in mind, namely: (i) To unlock value for short-term profit gains; (ii) To support a quasi-long-only medium-term (circa. 7 years) investment diversification strategy; (iii) To acquire businesses for the building of conglomerate industrial groups of companies, i.e. forging “King Cong” funds.
For a more thorough introduction to hedge funds in general, readers are invited to read my earlier study titled:"The Challenge of reigning-in Hedge Funds through Regulation and the Need to improve Disclosure Requirements". the latter looks at:
1. Lack of transparency as a key feature of hedge fund investment
2. Benchmarking and Performance Measurement error
3. Risk management challenge presented by investing in hedge funds
4. Management Fees and their relation to performance and risk
5. Index funds & Fund of funds and their diversification advantages over hedge funds and other key topics
Table of Contents
Chapter 1 Introduction
1.1 Statement of problem
1.2 Aims of the study
1.3 Importance of the study
1.4 Brief overview of the study
Chapter 2 The history of hedge funds
2.1 In the beginning
2.2 Definition of a hedge fund
2.3 Revival,…again and again
2.4 Summary
Chapter 3 The evolution of the hedge fund industry
3.1 Investor profile
3.2 Hedge fund management and investment strategies
3.3 Relationship with investment banks
3.4 Summary
Chapter 4 Shareholder activism and corporate governance issues
4.1 History of shareholder activism
4.2 Impact of hedge fund shareholder activism
4.2.1 The Deutsche Börse case
4.2.2 The McDonald’s case
4.2.3 The Medidep SA case
4.3 What the future has in store…
4.3.1 Corporate governance under siege
4.3.2 Shareholder activism challenged
4.4 The future of shareholder activism for hedge funds
4.5 The King Cong Funds
4.5.1 Eddie Lampert’s ESL
4.5.2 Kennith Griffith’s Citadel
4.5.3 Stephen F. Feinberg’s Cerberus
4.5.4 Summary
Chapter 5 Conclusions and recommendations
Research Objectives and Themes
This paper examines the rise of hedge funds as influential market participants, focusing on their evolving relationship with investment banks and their increasing adoption of shareholder activism as an investment strategy. The research explores whether these funds prioritize long-term corporate health or short-term value extraction and assesses the resulting impact on corporate governance structures in the companies they target.
- The transition of hedge funds into dominant, multi-billion dollar financial entities.
- The symbiotic, yet increasingly competitive, relationship between hedge funds and global investment banks.
- The shift from passive investment to active engagement in corporate governance and board-level decision-making.
- The emergence of "King Cong" funds that function as industrial conglomerates.
- The effectiveness and future implications of hedge fund activism for global financial regulation.
Excerpt from the Book
The Deutsche Börse case
After having operated profitably and stocked a war chest, the German Stock Exchange led by former Deutsche Bank chief executive, Rolf Breuer decided to make a bid for the London Stock Exchange, envisaging that the fusion of the Börse’s superior efficiency with the capital market leadership of the London Stock Exchange would establish the combined firm as a truly global force. Neither Breuer’s team, nor any one else in corporate Germany, it seems, had reckoned on the interest of hedge funds. The Childrens’ Investment (TCI) hedge fund had increased its holding in Deutsche Börse to 8%, Atticus Capital held 6.5%, and together with other hedge funds they opposed the take-over bid, and objected to the Deutsche Börse’s corporate governance standards.
TCI believed that shareholders would be better served if management paid out a higher dividend as opposed to pursuing the bid. Atticus on the other hand also held 9% of Euronext, another European stock exchange, and supported a merger between Euronext and Deutsche Börse which according to David Slager, Atticus’ European Fund portfolio manager, would “create a Eurozone champion with the resources and franchise to compete for global liquidity and global listings”(Chung, 2005).
The hedge funds and their supporters not only got their way, but they also forced Deutsche Börse Chairman Breuer, an iconic leader of modern-era German banking, and the Börse’s CEO, Seifert to step down. The Deutsche Börse subsequently agreed to return €1.5 billion in cash to shareholders through share buybacks and higher dividends by May 2007. Breuer later lamented that the shareholder revolt “rips the heart out of the German economy” (Kollewe and Reece, 2005). Germany’s Democratic Socialist Party Chairman, Franz Munterfeering referred to hedge funds as plagues of locusts, accusing them of “descending on companies, chewing them up and moving on”.
Chapter Summary
Chapter 1 Introduction: The problem statement and aims of the study are stated with emphasis on the relevance and importance of the study to the field.
Chapter 2 The history of hedge funds: Looks at the history, definition and legal and financial characteristics of hedge funds.
Chapter 3 The evolution of the hedge fund industry: Looks at the changes that have taken place in the industry to date in terms of the fund management, investor profile, investment strategies, new sectors and markets; as well as their relationship with large investment banks.
Chapter 4 Shareholder activism and corporate governance issues: Looks at the history, impact and possible future of shareholder activism for small, medium and large hedge funds, as well as at the potential impact of such action on the corporate governance policies and processes of firms. The involvement of hedge funds in the Deutsche Börse’s take-over bid of the London Stock Exchange, Medipep SA and McDonald’s will be reviewed. The future for hedge funds will be discussed, including the raison d’être of conglomerate funds and why they will remain for the foreseeable future.
Chapter 5 Conclusions and recommendations: Provides the conclusions of the study and recommendations for stakeholders for dealing with this challenge.
Keywords
Hedge Funds, Shareholder Activism, Corporate Governance, Investment Banks, Leverage, Institutional Investors, Asset Management, Financial Markets, Conglomerate Funds, Regulatory Oversight, Absolute Return, Market Efficiency, Proxy Fights, Capital Allocation, Risk Management.
Frequently Asked Questions
What is the core focus of this research?
This work explores the transformation of the hedge fund industry from its origins to its current status as a major global financial force, specifically analyzing its shift toward aggressive shareholder activism and its intricate, symbiotic relationship with large investment banks.
What are the primary themes discussed in the book?
Key themes include the institutionalization of hedge funds, their influence on corporate governance, the strategic use of leverage, the "retailization" of hedge fund access, and the rise of conglomerate funds that operate across diverse industrial sectors.
What is the central research question?
The study investigates the nature of the relationship between hedge funds and investment banks, and examines the impact of 'activist investing' on the decision-making processes and corporate governance standards of targeted publicly listed companies.
What methodology is applied?
The paper utilizes a qualitative research approach, synthesizing existing academic literature, case studies of specific market interventions (e.g., Deutsche Börse, McDonald’s), and industry reports to analyze how hedge fund strategies influence market and corporate behaviors.
What topics are covered in the main section?
The main part of the book covers the historical development of hedge funds, the professionalization of their management, their reliance on and competition with investment banks, and detailed analysis of recent high-profile activist campaigns.
How would you characterize the primary keywords?
The work is defined by terms centering on financial activism, regulatory challenges, the structural relationship between banks and hedge funds, and the performance-driven nature of absolute return investment strategies.
How did the Deutsche Börse case illustrate hedge fund power?
The case demonstrated the ability of hedge funds to act in concert to block major strategic mergers, force the resignation of top-level executives, and compel companies to adopt shareholder-friendly capital policies like buybacks and increased dividends.
What is the significance of "King Cong" funds?
The term describes a new breed of hedge funds that utilize massive cash reserves and technological infrastructure to acquire and manage entire industrial companies, effectively transitioning from pure investors to integrated conglomerate operators.
- Quote paper
- LL.M. Russell Mutingwende (Author), 2006, Hedge Funds: The Protean Survivalists , Munich, GRIN Verlag, https://www.grin.com/document/86643
