Research

2016 Roundup - Activist Hedge Funds

Activist hedge funds, a sub-strategy of event driven hedge funds, deploy shareholder activism as a key cornerstone of their investment strategy and have closer interactions with management of the companies which they invest into. Cultural differences also play a part in the adopted style of activism with Western activist hedge funds pursuing a dynamic approach, while their Asian counterparts adopt a more engagement-styled activism. This special feature takes a quick look at activist hedge funds, which have markedly outperformed their global hedge fund peers in 2016.

Activist hedge funds have seen their assets under management (AUM) dip below US$100 billion as of February 2017, with AUM currently standing at US$97.9 billion. Investor redemptions have been picking up pace over the past three years with net outflows of US$5.8 billion recorded since 2015. Strong investor redemptions were recorded over the past year with net outflows of US$5.3 billion attributed to the closure of some big names within the activist hedge fund scene. This coupled with modest performance-based figures have led to less gusto for the activist hedge fund sphere. With uncertainty around Brexit, prospect of rates hikes coming sooner than expected and deregulation in the US around financials, healthcare and commodity (oil/shale) sectors, activists could be chasing some interesting themes in the near future.

Figure 1 shows the performance of activist hedge funds versus the Eurekahedge Hedge Fund Index since December 2006. The average activist hedge fund posted annualised gains of 6.20% during this period, slightly ahead of the Eurekahedge Hedge Fund Index which was up 6.02%. In terms of volatility, activist hedge funds posted an annualised standard deviation of 9.17% while that of hedge fund peers have come in at 4.99%, resulting in Sharpe ratios of 0.57 and 1.01 respectively.

Figure 1: Activist hedge funds vs. Eurekahedge Hedge Fund Index
Eurekahedge north american hedge fund indices


Table 1 summarises the key performance statistics for activist hedge funds versus global hedge funds. Key takeaways include:

  1. Activist hedge funds posted annualised gains of 6.20% slightly ahead of global hedge funds which posted annualised gains of 6.02%.

  2. Activist hedge funds have outperformed their peers for most of the time period under consideration, barring 2008, 2011 and 2015 to which activist funds posted steep losses.

  3. In recent years, activist hedge funds posted the impressive returns in 2013, gaining 13.42% on the back of an active M&A scene with managers reporting performance-based gains of US$13.1 billion during the year.

  4. In 2015, activist hedge funds posted their first negative annual returns in five years, down 0.34%, with some M&A deals failing to close citing legislative hurdles.

  5. Returns for activist hedge funds have been less stellar post-2013 with a number of high profile M&A deals failing to close, particularly within healthcare sector.

  6. On a risk-adjusted basis, activist hedge funds posted Sharpe ratio of 0.57 while global hedge funds posted Sharpe ratio of 1.01.

  7. Volatility levels of activist hedge funds were almost twice that of global hedge funds, with the former at 9.17% while the latter at 4.99%.

  8. Maximum drawdown of activist hedge funds is more than double that of global hedge funds. Activist hedge funds posted maximum drawdown of close to 30%, while global hedge funds posted maximum drawdown of close to 13%.

Table 1: Performance statistics – Activist hedge funds vs. global hedge funds

Key Stats
Global Hedge Funds
Activist Hedge Funds
Correlation of returns with global hedge funds
1
0.91
Annualised returns
6.02%
6.20%
Downside deviation
3.19%
6.53%
Annualised volatility
4.99%
9.17%
Sortino Ratio (RFR = 1%)
1.57
0.80
Sharpe Ratio (RFR = 1%)
1.01
0.57
Maximum drawdown
(12.53%)
(29.66%)
Positive months
83
80
Negative months
39
42
Average monthly positive return
1.25%
1.92%
Average monthly negative return
(1.08%)
(2.09%)

*All statistics for period covering December 2006 to February 2017
**Based on 48.00% of funds which have reported February 2017 returns as of 17 March 2017
Source: Eurekahedge


In Table 2 the performance of activist hedge funds versus global hedge funds over the past 10 years is displayed. Activist hedge funds have outperformed global peers over the period analysed barring 2008, 2011 and 2015 where the strategy posted losses. Activist hedge funds posted impressive returns in 2013 on the back of an active M&A scene however this was short-lived in the years following that when some high profile M&A deals within healthcare sector fell through. In 2015, activist hedge funds posted their first negative annual returns in five years, down 0.34%, with some M&A deals failing to close citing legislative hurdles.

Table 2: Performance of activist hedge funds vs. global hedge funds over the past 10 years

Year
Global Hedge Funds
Performance of Activist Hedge Funds
2007
13.62%
15.88%
2008
(9.69%)
(28.14%)
2009
20.97%
46.97%
2010
11.44%
16.38%
2011
(2.01%)
(5.44%)
2012
6.85%
9.09%
2013
8.45%
13.42%
2014
2.82%
2.91%
2015
1.94%
(0.34%)
2016
4.53%
7.13%
2017
1.87%
(0.74%)

Source: Eurekahedge


Table 3 below shows the correlation matrix between activist hedge funds and other hedge fund strategies. Activist hedge funds have the highest correlation to event driven and long/short equities hedge fund returns based on the allocations into underlying assets and investment philosophy.

Table 3: Correlation Matrix
Correlation Matrix


Displayed in Figure 2 is the risk-return performance across all strategies inclusive of activist hedge funds since December 2006. Over this period, macro mandated hedge funds posted the lowest volatility (3.43%) while posting annualised returns of 5.78%. Activist hedge funds posted an annualised volatility of 9.17% while annualised returns for the strategy have come in at 6.20%. Distressed debt hedge funds posted the best annualised gains across all strategies (7.34%), with annualised volatilities of 7.23%.

Figure 2: Risk-return performance across all strategies
north american hedge fund risk-return performance across strategies

The AUM for the industry has dipped slightly below US$100 billion as of February 2017, brought about by a spate of investor redemptions with investors redeeming US$5.3 billion in 2016 alone. The industry has recorded net investor outflows of US$5.8 billion since 2015, while managers posted performance-driven gains of US$2.2 billion over the same period.

Figure 3: Asset flow breakdown for activist hedge funds
north american activist hedge fund asset flow breakdown

The full article inclusive of all charts and tables is available in The Eurekahedge Report accessible to paying subscribers only.

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