Know When to Hold 'Em, and Know When to Fold 'Em: The Success of Frequent Hedge Fund Activists

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Using a sample of 272 hedge fund activist events from 1994 to 2005, we show that targets of high frequency hedge funds – those that target 10 or more firms during the sample period –experience better long-term stock and operating performance than targets of lower frequency hedge funds or a matched sample. This outperformance persists up to three years after activism. These high frequency activist funds target smaller firms with poor prior stock and operating performance, and achieve success through a two-pronged approach. For 60% of targets, they simply buy the stock, wait for it to appreciate, and then sell at an opportune time. For the remaining 40% of targets, they are rather aggressive and consistent in their approaches; often they gain board representation through a proxy fight/threat or a standstill agreement. They also frequently encourage and get changes in corporate governance and/or the sale of the target firm. In addition, high frequency activists are extraordinarily skilled at avoiding target firms that have eventual bad outcomes: their targets rarely liquidate or file bankruptcy post-activism. Finally, high-frequency activist funds have a well-defined exit strategy and quickly exit target firms that are unlikely to improve, while less frequent activist funds do not. Our results provide compelling evidence of skill among a subset of hedge fund managers.