How Activism Affects Hedge Funds

25th July 2022

From as early as the 1900s, hedge fund activism has drastically risen as a prevalent corporate governance mechanism, a profitable investment strategy, and as a broader theme for shareholder activism.

Activist hedge funds frequently demand that companies increase their share price through restructuring, diversification, termination of arranged mergers, command and control improvements, monetary policy shifts, and substitution of top management and board members.

Even more, hedge fund activism, and the reforms desired from hedge fund activists, may create enormous unpredictability or negatively affect the intended firm’s workers’ employment. Hedge fund activists have a long-term effect on the company’s shareholders and the company’s overall performance.

The positive effect of Activism on Hedge funds

Hedge fund activism influences overall operations. It has been shown that hedge fund activism benefits the productivity of particular companies in various ways.

  • Activist hedge funds, in particular, are increasingly playing a part in acquisitions and mergers as well as relating to business reform.
  • AHF reorganization also includes job losses and asset sales, all designed to safeguard potential returns in market valuation and functionality.
  • AFH can also implement restructuring by reducing salaries or wage cuts, increasing a firm’s value and general performance. These approaches violate long-term informal workers contracts, thus enable redistribution of wealth from the employees to owners.

The negative influence of activism on hedge funds

Even though hedge fund activism tends to have a favorable outcome impact on aggregate, there has been significant variation throughout the respondent representing across selected companies. See below:

  • Hedge fund activism affects regular hours and employee pay; they barely improve despite the increased productivity.
  • Activist fund managers frequently demand that company increase their earnings growth through the company.
  • Employees can also be negatively affected by hedge fund activists’ goals in case they are accomplished. These activist groups are only interested in what benefits them rather than what is best for employees of a particular company.
  • Management and workers will incur severe implications for their competitiveness within the job market and subsequent professions if such a company fires them. Wage cuts may also increase employee quitting their job or demoralize the employee, thus decreasing productivity.

Ultimately, in the last two decades, there has been a significant rise in activist hedge funds. This is a clear sign of how important they are for companies and the economy. Nevertheless, they play a critical role in closing the gap between prices and fair value in the financial markets.