A lot of folks who ought to know better seem to believe that hedge funds make good shareholder activists. Some of them even claim to have empirical evidence that hedge fund interventions are positive for firm performance or stock price or something or other. But I wonder. The Economist, after all, tells us that:
WHEN it comes to brainboxes, the name “Nobel” has a certain ring. But news that the Nobel Foundation plans to increase its investment in hedge funds, because years of low returns forced it to cut cash prizes in 2012, is one to leave laureates scratching their eggheads. The past year has been another mediocre one for hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. Although it might be possible to shrug off one year’s underperformance, the hedgies’ problems run much deeper.
The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation. Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.
Yet, these lousy investors supposedly are great and powerful corporate governance wizards who know how to run companies better than the firms' own directors and managers! Or so they and their academic enablers would have us believe. But I'd like somebody to explain that one to me.