$120B in Assets Signals the Endurance of Activist Investment

But the approach accounts for less than 4% of the $2.8 trillion hedge fund industry, according to sector data.

Activist hedge funds have grown exponentially in the last 10 years, reaching nearly $120 billion in assets and delivering strong performance, according to the Alternative Investment Management Association (AIMA)

Citing data from Hedge Fund Research and Citi, the industry organization said activist hedge fund assets increased 269% between 2009 and 2014. They also made an in annual return of 19.4% over the five years ending December 31, 2013.

This meant, activist hedge funds outperformed both the stock market and the overall hedge fund industry, the paper said. In the 10 years ending June 2014, they produced gross returns of 267.7%—or more than double the S&P 500’s returns in the same time period.

However, despite the recent surge in assets and outperformance, activist funds accounted for less than 4% of the $2.8 trillion hedge fund industry, with only 165 firms running such vehicles.

The paper highlighted the additional risk that accompany these funds, which may contribute to the relative lack of popularity for such recent star performers.

Because activist funds hedge less than other investors in their sector, have longer investment horizons, and hold highly-concentrated portfolios, they are more exposed to idiosyncratic risk, AIMA said.

In addition, activist returns are often unpredictable and strongly depend on the ability to achieve an “outcome,” resulting in higher volatility than other hedge funds and the S&P 500.

Citing Preqin, AIMA said institutional investors accounted for nearly 81% of those interested in activist hedge funds, despite making up only 59% of overall hedge fund investors. Those with a strong appetite for activist funds were also likely to prefer direct investments and already established hedge funds.

AIMA was also positive about the impact activist hedge funds have on targeted companies. According to the paper, activism produced average long-term improvements in share price, operations, and productivity, and led to greater alignment of interests by seeking higher standards of governance.

“We regard activist hedge funds as the keys that are unlocking value in public and private enterprises, delivering gains to their investors, the companies in which they invest, and ultimately, the broader economy,” Jack Inglis, AIMA’s CEO, said.

AIMA’s members include activist hedge funds and collectively manage more than $1.5 trillion.

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