Activist funds, which buy stakes in companies in order to force changes in their operations, are one of the hottest trends in finance. Over the past year, the money flowing into them has surged so much that their assets under management are up more than 50 percent, while those of hedge funds as a whole have risen less than 15 percent.
What is driving the growth of activism? The most immediate reason is that the funds are performing well, as a report from Citigroup Inc.'s Financial Strategy and Solutions Group, of which I am chairman, shows. Since the beginning of 2009, activist hedge funds, on average, have earned an annual return after fees of almost 20 percent, compared with 13 percent for the stock market as a whole and 8 percent for all hedge funds. (That's right: After fees are taken into account, hedge funds have underperformed the market.) The managers of the most successful funds are becoming legends by combining outsize returns with colorful personalities.
These funds are also growing in number, and they're aiming for larger and larger companies. This year, for example, Carl Icahn bought a large share of Apple Inc. stock, ValueAct Holdings LP has targeted Microsoft Corp., and Trian Fund Management LP has pursued DuPont Co. Although most activist campaigns still occur in the U.S., foreign activity is rising rapidly, too.
Even strong stock market performance is no longer protection against an activist effort. This year, more than half of targets had outperformed their peers before the activist campaigns began. Activists clearly believe that, with changes, successful companies can perform even better in the future.