Activist investments
Activist investment is a form of investment used by some big hedge funds, in which the investment fund uses its right to vote the members of the board of directors in order to shape the company decisions.
Why only large hedge funds do that? That’s because, in order to have enough power to influence the board of directors you have to own a !!BIG!! stake in the company. Something that the average retail investor can’t afford. None the less, many times the hedge fund still has to convince more passive institutional investors like BlackRock, Vanguard, State Street etc.. because they don’t own a majority stake in the company. But if they ally with other relevant investors they can proceed more easily with transformation in the company. This technique started to be very well known in the 80s when Carl Icahn and Thomas Boone Pickens started buying big stakes in publicly traded companies. After amassing a big stake they forced managements to create value for shareholders, so the management either had to do what these hedge fund managers wanted them to do or to pay them a premium in order to convince them to back out of the equity of the company. They were considered corporate raiders rather than activist investors. More recently Carl Icahn had a clash BlackRock Chairman and CEO Larry Fink. Larry Fink accused activist investors of not worrying for the well-being of companies on the long term, but only about the short term gains. This attack was aimed at Icahn himself. He also criticized the way activists come out in public attacking companies. As a matter of fact, activists frequently use media like tv, news outlets etc… to influence the public perception towards a company in order to shift its decisions. New strong criticism came when investor Bill Ackman came out live on CNBC making terrifying predictions about the markets earlier this year because of lockdowns and during this interview the stock market dropped significantly. It later came out that Bill Ackman held shorts in the markets for billions of dollars and that drop increased his profits.
Activist investment has also a bright side. For example when the management is not acting in the best interest of the shareholders, these investors can push for change for example by cutting on expenses, cutting unnecessary bonuses for management etc… Otherwise these investors can report companies that are not working well more in general. For example Bill Ackman understood the risks of Credit Default Swaps on Mortgage backed securities. So he shorted MBIA, an important operator in this field and pushed the government to step in the company to regulate it. By doing so he made it clear for the public that the company wasn’t operating correctly, so that retail investors would stay away from that company. No action was taken by the authorities but he held his shorts until The great crisis came and the company went bust.
We’ve already covered Elliott Management founder Paul Singer so check that out. We’ll soon cover Carl Icahn, Bill Ackman and other activist investors so make sure not to leave without subscribing to the channel.




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