Tracking the Hedges and Activists

A recent article in BusinessWeek highlights a topic readers of World Beta have been privy to for some time – that following the top investors can lead to abnormal returns. Another paper, “The Investment Value of Mutual Fund Portfolio Disclosure“,tackles the subject.


This paper uses disclosed mutual fund portfolio holdings to develop stock selection models. Our models aggregate portfolio holdings across mutual funds, weighted by their past performance, to predict future stock returns — an overweighting by successful managers, or an underweighting by unsuccessful managers is considered to be a signal that a stock is currently underpriced. We find that investment strategies based on our stock signals generate returns exceeding seven percent during the following year, adjusted for the size, book-to-market, and momentum characteristics of the stocks. This evidence suggests that some managers have superior stock-selection skills, and that these skills strongly persist. Further, returns generated from our mutual fund holding-based strategies have a low correlation with those of 12 quantitative investment signals that are based on prior-documented market anomalies. Thus, our stock selection signals are unique, and indicate that some fund managers possess private skills that are unrelated to known anomalies.

In another paper titled, “Value Creation or Destruction“, the author finds that activist investors return more than passive investors. . .I imagine the best way to follow the activist funds would be to track them daily from position inception rather than quarterly (the way I have been doing it). I plan on discontinuing tracking the activist portfolio, as I do not want to update it regularly. 13D Tracker (blog) and 13D Monitor (subscription, $1250/month) both focus on the space.


I examine the effects of shareholder activism by hedge funds from 1998-2005. When hedge funds accumulate more than 5% of a firm, they must file a regulatory disclosure with the SEC that indicates whether their intentions are active or passive. I find that firms which are targeted by hedge funds for active purposes earn larger excess returns than a control group of firms that are targeted by the same hedge funds for passive purposes. Firms targeted by activists experience increases in operating performance (ROA) following the acquisition of the block. These operational improvements appear to be driven by the divestiture of underperforming assets. I document that the returns to the hedge fund are larger for their active blocks than their passive blocks, indicating that activist shareholders may use higher returns to mitigate the cost of their monitoring effort.