Continuing on with my fascination of the surge in attention on hedge funds and private equity, Knowledge@Wharton published an article recently about a study that has attempted to document the impact the effect of hedge funds upon the stock of the companies in which they have invested. It’s an interesting article, but they now require you register (it’s free). Here’s a snippet of one of their conclusions:
Despite the industry’s high profile, the 8,800 funds’ inner workings remain shrouded. These lightly regulated investment pools for wealthy investors don’t report their holdings and say little about their investment strategies. With an estimated $1.2 trillion under management, hedge funds must impact the financial markets. The question is: How?
In one of the first studies to shed light on that question, researchers at Wharton and three other business schools find that hedge funds’ efforts to improve companies they hold big stakes in have spillover benefits for all shareholders: a quick 5% to 7% jump in stock prices. The gains, measured as an “abnormal return” on top of the broad market’s, were nearly 11% when a hedge fund pushed for the targeted company to be sold.
This makes hedge funds far more effective than other activist shareholders, such as pension funds and mutual funds, the researchers say.
According to the study, the share-price boost came during the 40-day period surrounding a hedge fund’s public announcement of a push for change. “The price gain came immediately upon the announcement,” said Wei Jiang, a finance professor at Columbia Business School who is a visiting faculty member at Wharton. The gains were therefore caused by investors’ anticipation of improved company performance to follow. “The improvements will occur anywhere from a year to two years down the road,” she added.
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