Hedge Funds and Their Investor Activism: Do They Help or Hurt Other Equity Investors?
Schneider, M., Ryan, L. V.
Type of Research
Peer-Reviewed Journal Articles
2011, After July
Discipline-based scholarship (basic research)
Journal of Management and Governance
Hedge funds tend to be highly activist investors who exercise their “principal power” over their portfolio firms. We observe that, compared to other investor types, hedge funds appear to be even more activist than is predicted by a comprehensive Investor Activism Model, due to the unexpectedly large role of several antecedent variables. This conclusion suggests that the relatively lightly regulated environment of hedge funds affects the weighting of conventional activism-antecedent variables. We explore how their unique access to several investing and trading strategies is allowing hedge funds to redefine investor activism. In the process, we find that, while hedge funds and their activism tend to benefit fellow investors, the potential exists for some specific hedge fund types to expropriate value from minority shareholders, creating “principal-principal” conflict. The potentially detrimental impact of hedge fund activism on other equity investors is demonstrated, illuminating several current policy concerns.