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Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World by Ronald D. Orol

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Chapter 9

Institutional Investors on Activist Hedge Funds

Love'em or Hate'em?

Institutional investors have had a love-hate relationship with activist hedge fund managers for many years.

At the most basic level, activist investors press for change at companies simply because they own large stakes in a few businesses that are a focus of all their value-enhancing energy and efforts. Pushing for those changes is what they do to raise the stock price and bring home the profits.

Meanwhile, most institutional investors such as public and corporate pension plan managers, investment banks, or mutual fund operators are stuck with hundreds of tiny investments. The cost-benefit analysis runs against having mutual fund managers take the time, energy, and capital to engage management at their hundreds of investments. Of course, spending time, energy, and money is exactly the sort of thing an investor needs to do to bring about change at a particular corporation.

Hence, these institutional investors are often called “plain vanilla” or “passive” investors that will be more likely to accept certain things about their investments, such as overcompensated CEOs, rather than fighting for change. The 2006 study, “Hedge Fund Activism, Corporate Governance, and Firm Performance,” points out that institutions are less willing to inform themselves about “micro-level” issues that any portfolio company faces, in part, because efforts to turn around a particular corporation would at best translate into a very ...

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