David F.


MODULE NUMBER MBA 2006 INDIVIDUAL PROJECT The influence of hedge funds on share prices SUPERVISOR Michael A.H. Dempster Hand in date Friday 31st August 2007

10901 (Excluding Appendices and Bibliography)

I give permission for the following people to have access to my individual project:

Tick Box Unavailable for viewing (authorised personnel only) Available to Cambridge University staff and students Available only after consultation with me Do you give permission for your individual project to be made available on the JBS website as a PDF file (i.e. a file that is read-only, and cannot be edited)? If not, do you give permission for a PDF version to be placed on the Intranet, where only members of Judge Business School can download it? X X

I confirm that this piece of work is my own unaided effort and conforms to Judge Business School’s guidelines on Plagiarism.

Please sign: ……………………………………………………….

This paper examines the extend to which hedge funds influence share prices of publicly traded companies, by looking at 46 hedge fund related events in Germany between January 2004 and July 2007. There are multiple ways through which hedge funds could push up the price of a share, most notably through direct activism, i.e. facilitating corporate change in the target firm that improve performance as well as through playing out market psychology, i.e. making the market believe that the target in current undervalued. Unlike related studies in the U.S. which found that hedge funds do have a positive influence on target shares, my research can not find proof for positive (or negative) abnormal returns attributable to hedge funds. The mean abnormal return of the 46 events is only 2.2% when benchmarked against the market index and only 1.3% when benchmarked against industry peers. Both values are statistically not significantly different from zero and can therefore not be used as proof of the hypothesis that hedge funds do have a positive influence. The different findings from the U.S. are explained by the fact that Germany still stresses stakeholder value over shareholder value and that shareholder activism isn’t a recognized part of German corporate Governance. There are, however, a few occasions where hedge funds evidently did have a directly attributable (short-term) influence on share prices so that overall the report concludes that while hedge fund’s influence on German shares is weaker than in the U.S., in some cases hedge funds are able to make a difference.


―Are powerful fundamental factors at work to keep the market as high as it is now or to push it even higher, even if there is a downward correction? Or is the market high only because of some irrational exuberance— wishful thinking on the part of investors that blinds us to the truth of our situation?‖ Robert J. Shiller


Abstract ................................................................................................................. 2 1 1.1 1.2 2 2.1 2.2 2.3 2.4 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 4.4 5 Introduction................................................................................................. 5 Background.............................................................................................. 5 Objective .................................................................................................. 8 Hedge Funds ............................................................................................... 8 What is a Hedge Fund ............................................................................ 9 Types of Hedge Funds .......................................................................... 10 Activist Hedge Funds ........................................................................... 11 Implications for the Study .................................................................... 12 Share Prices................................................................................................ 13 Common Valuation Methods ............................................................... 13 Psychological Effects ............................................................................. 14 Random Walk ........................................................................................ 15 Can Hedge Funds Influence Share Prices? .......................................... 15 Quantitative Analysis ............................................................................... 19 Methodology ......................................................................................... 20 The Hypothesis...................................................................................... 24 Analysis of 46 Hedge Fund Related Events ........................................ 26 Findings ................................................................................................. 32 Conclusion ................................................................................................. 33

References ........................................................................................................... 36 Appendix ............................................................................................................ 39 A. B. C. D. E. F. Hedge Fund Events............................................................................... 39 Hedge Fund Event Data ....................................................................... 41 Performance Graphs ............................................................................. 42 Hedge Fund List .................................................................................... 57 Hedge Fund Managers ......................................................................... 61 Hedge fund strategy categories (as per TASS database) .................... 62


Hedge funds have already been around for over half a century. The first hedge fund was founded by Alfred W. Jones in 1949 and it was called a hedge fund because Jones hedged his long positions through using short positions. Jones idea was to outperform the market while at the same time reducing his risk through hedging and therefore he called his investment fund a “hedge fund”. Nowadays hedge funds are widely known as very risky investments. The famous hedge fund manager Mario Gabelli wrote in 2002: "Today, if asked to define a hedge fund, I suspect most folks would characterize it as a highly speculative vehicle for unwitting fat cats and careless financial institutions to lose their shirts" (McWhinney, 2005). In fact, research has shown that hedge funds indeed are highly speculative and risky. Research by the European Central Bank (Garbaravicius and Dierick, 2005) estimates that first year failure rates of hedge funds are in the range of 2% and 4%. A more detailed study by Chany, Getmansky, et al. (2005) found an annual attrition rate of 8.8% for the period 1994-2003. The found that the risk involved differs for different investment strategies and goes up to 14.4% attrition rate for managed futures strategy hedge funds. Further, they estimate the average liquidation probability for funds in 2004 is over 11%, which is higher than the historical unconditional attrition rate of 8.8%. With a yearly attrition rate of 11% it is fair to say that hedge funds are indeed risky investment vehicles. In July 2006 the Securities Exchange Commission (SEC) estimated that there were 8,800 hedge funds, managing total assets of $1.2 trillion (Cox, 2006). With such large numbers of hedge funds and high attrition rates it is not surprising that every year hundreds of hedge funds are liquidated, yet once every few years, when a major hedge fund collapses, such event is popularized in the news and the public gasps in disbelieve at how such a large fund can collapse. Famous examples are Long Term Capital Management in 1998 (which was probably the first time that many people ever heard the term hedge fund), Tiger Funds in 2000 and very recently Bear Stearns in 2007. Due to their high leverage and their sheer volumes (mostly financed by leverage), financial distress of major hedge funds can cause an avalanche, putting banks and private investors equally at risk. It is therefore of little surprise that hedge funds receive an increasing amount of press coverage,


which, mostly reporting bad news, leads to ill feelings amongst the average population.
12,000 $1,800

Number of Hedge Funds

8,000 6,000 4,000 2,000

$1,200 $1,000 $800 $600 $400 $200

1950 1971 1987 1993 1995 1997 1999 2001 2003 2005 2007
Source: Hennessee Group LLC


Assets in $bn

Number of Funds

Figure 1 - Hedge Fund Growth

In April 2005 Franz Müntefering, former German Federal Minister of Labour and Social Affairs, publicly called private equity firms locusts, and quickly, through the yellow press, this term was adopted for hedge funds as well. Hedge funds and private equity firms are confused by many Germans and both are seen as equally greedy and destructive. Only shortly afterward Müntefering’s public condemnation of private equity firms the G7 started talks about regulating hedge funds and as of today their talks are still ongoing (Dougherty, 2007). The German government has expressed concerns that a collapse in the hedge fund industry, which could be triggered by the collapse of one of the big hedge funds, could lead to global disorder. This is a rational fear, not only because hedge funds are inherently risky and their numbers and their managed assets are increasing, but also because they are not regulated and because their share on financial transactions is much bigger than one would assume (Braun, 2007). Almost as a proof of such a theory, the recent collapse of two Bear Stearn’s hedge funds has caused ripple effects which as of today have already impacted two German banks. According to the International Herald Tribune hedge funds are controlling assets worth $1.4 trillion (Dougherty, 2007). Alpha Research Inc. estimates that the largest 100 hedge funds alone manage $1.1 trillion (Rose-Smith, 2006) and further

Assets in billions




estimates project hedge funds to grow 300% over the next five years (Schiller, 2006). These numbers by themselves are quite impressive. Yet, more relevant is the finding that 40% to 50% of all trade at the U.S. and U.K. stock exchanges is conducted by hedge funds (Braun, 2007; Schiller, 2006; Atzler 2005b). Considering the value of assets controlled by hedge funds, their predicted growth rate as well as and their already high level of trade, it is apparent that hedge funds have a significant influence on today’s financial markets. While it is therefore justifiable to assume that hedge funds have a considerable impact on the stability of financial markets and share prices there is only little quantifiable evidence of these assumptions. Some recent studies, most notably those by Brav, Jiang, Partnoy and Thomas (2006), Klein and Zur (2006) and Boyson and Mooradian (2007) are providing hard evidence that hedge funds, on average, are not an evil but a blessing to the average shareholder in the way that they act as shareholder advocates and agents for corporate change. All three studies find that hedge fund activism generates between 7% to 10% abnormal return with no apparent reversal over the following years. Not surprisingly, most of the studies available on hedge fund activism and its impact on corporate governance and on share prices are focusing on the United States. The U.S. is the biggest financial market in the world with some of the world’s biggest stock exchanges. Also, the majority of hedge funds is located in the U.S. However, this doesn’t mean that hedge funds don’t operate globally. On a global scale hedge funds “only” manage 5% of total global assets (Schiller, 2006), but the biggest 100 hedge funds alone could completely buy Germany’s biggest 30 companies (the DAX30) and would still have spare money to spend (Süddeutsche Zeitung, 2007). That’s of course only a hypothetical statement but recent estimates show that 20%-30% of all German DAX and MDAX shares are owned by hedge funds (Atzler, 2005a). This means that around one quarter of Germany’s biggest companies is controlled by hedge funds. Given the increase in hedge funds and the increase in assets managed by hedge funds it is rational to assume that competition among hedge funds is growing. Goetzmann and Roos argue that as a result of this increased competition hedge funds are more and more investing in new regions and are using new


strategies. The overall goal that unites all hedge funds is that they are trying to beat the market (Goetzmann and Ross, 2000). During the 1990s a lot of hedge funds specialized in arbitrage trading (Goetmann and Ross, 2000), however, with the increase in competition such arbitrage opportunities become more difficult to find. As a result hedge funds are turning to alternative strategies, including hedge fund activism (Klein and Zur, 2006) but they also invest more and more outside the U.S, for example in Germany . Since Franz Müntefering in his speech in 2005 called hedge funds “locusts” hedge funds have gained significant attention by the German public. Müntefering of course was not the initiator; he was only the catalyst that started a debate throughout which hedge funds emerged as one of the great evils of the 21 st century. This prompts the question if hedge funds in Germany are correctly brand marked as locusts or whether they maybe even exert a positive influence on the market as the above mentioned studies from the U.S. have found them to be.

I have explained that hedge funds have a quite substantial equity position in the German financial market. Recent research on the U.S. market has shown that hedge funds can have quite a positive impact on share prices and that their overall influence is quite positive, whereas their image in Germany is that of short-term investors who destroy companies like locusts. In this paper I will explore the role that hedge funds in Germany really play. I will verify if conclusions similar to those from U.S. studies can be drawn with regards to the German market. More specifically, I will analyze if hedge fund activity in Germany has a positive influence on share prices, i.e. if hedge funds, through one way or another, increase the value of shares that they invest in.

Before diving into the analysis of the data I need to come back to the general definition of hedge funds as this is relevant for the research. The objective of this research is to analyze this impact of hedge funds on share prices, in particular for the German market. I have already shown that in the public eye it is often difficult to differentiate between hedge funds and private equity firms. Also, the objective


of this study would lead to conclude that this research needs to include all hedge fund activities. However, I have already referred to the subset of hedge funds, namely activist hedge funds that play an important role. In this section I will define what activist hedge funds are and why I focus on them rather then including all hedge funds. Before I get to this, there are two key points that require clarification: first, what exactly are hedge funds, and, second, what different types of hedge funds exist.

Ronald Lake, a practitioner working for a large hedge fund, defines hedge funds based on merely two characteristics: ―(i) they are commingled pools that are offered via private placements to a relatively limited number of institutions and sophisticated investors, and (ii) the manager receives an incentive fee” (Lake, 2003). That, as he admits himself, is a fairly loose definition but at the same time it is also very precise. The problem with hedge funds is that they indeed need not share many common characteristics and the way they are trying to beat the market differs quite substantially. Brav et al. (2006) take a similar approach and also define hedge funds by their key characteristics but they find four common characteristics: “(1) they are pooled, privately organized investment vehicles; (2) they are administered by professional investment managers; (3) they are not widely available to the public; and (4) they operate outside of securities regulation and registration requirements”. Especially the last point, that hedge funds operate outside of securities regulation has recently been a point of great concern and at the same time, poses a challenge for any hedge fund related research. Since hedge funds are not regulated, they are not obliged to inform anyone of their existence. They don’t have to register with a central body and therefore no central data source exists that lists all hedge funds. Despite their commonalities, hedge funds are not a homogeneous class of investments; rather their commonalities are often restricted to the above four points. How they actually invest their money differs quite substantially. There are, however, sub-classifications of hedge funds which can help in understanding which hedge funds are more and which are less relevant to this study.


Like all investment funds hedge funds aim to generate a return. Goetzmann and Ross (2000) very nicely nailed this down to the point that the purpose of hedge funds is to yield absolute returns above the benchmark of the riskless rate. There are many ways hedge funds are trying to achieve this. The majority of hedge funds describe themselves as long/short equity, which is close to what Alfred Jones’s original concept of hedge funds stood for. Besides that, there are many different approaches used to exploiting market opportunities. The TASS database, which is still widely used by hedge fund managers, uses 11 broad categories (see appendix for detailed definitions). Convertible Arbitrage: The hedge fund manager focuses on discrepancies between a convertible bond and the corresponding equity and “works the spread”. For example, he buys a convertible bond and sells short shares of the same company Dedicated Short Bias: The manager emphasizes short positions in the market Emerging Markets: The fund manager focuses investments in securities of companies from developing (emerging) markets Equity Market Neutral: The hedge fund manager balances long and short positions Event Driven: The manager analyses opportunistically uses special events such as merger situations (merge arbitrage), distress situations, regulatory changes by anticipating how these events will influence the share price and using long or short positions accordingly Fixed-Income Arbitrage: The manager uses mixed short and long positions of related bonds with different yields Global Macro: The fund manager makes use of price differences of similar investments in different financial markets around the world (relatively mispriced) Long/Short Equity: This strategy generically describes any strategy that uses hedged investments in equities Managed Futures: The manager seeks basis convergence from underlying future prices in options


Multi-Strategy: Multi-Strategy is a combination of any of the above strategies Fund of Funds: The manager will invest in other hedge funds (at least two, often more) The above list is most likely not complete. In fact, the hedge fund market is evolving quickly and once in a while new strategies appear such as risk arbitrage (event related securities whose price differences imply different probabilities for an event), and statistical arbitrage. There is also a special form of hedge funds which could be classified as arbitrage or as event driven or as global macro but in fact doesn’t quite fit into any of these categories and some refer to this category as activist hedge funds.

Up until around 2000, most hedge funds profited from their ability to identify and capture trading opportunities, mostly arbitrage opportunities (Goetzmann and Ross, 2000). However, the rapid growth of the hedge fund industry has made it more and more difficult for managers to identify and exploit these arbitrage opportunities. As a result, many funds have turned to an alternative strategy – hedge fund activism (and new regions such as emerging markets) is just one example but one which is of high relevance to this research. Klein et al. (2006) define hedge fund activism as a strategy “in which a hedge fund purchases a 5 percent or greater stake in a publicly-traded firm with the stated intent of influencing the firm’s policies”. I agree with their statement with the exception of the 5% stake. The 5% stake is an arbitrary choice and the reason why they picked 5% is because that a 5% stake triggers a 13D filing to the SEC which makes their research easier. There is simply no other reason. The key message however is that activist hedge funds actively seek to influence the target firm. In some cases, especially when facing strong opposition from the target’s management, activist hedge funds form wolf packs or buy shareholder voting rights through undisclosed transactions, for example through the stock lending market (Hu and Black, 2006 and Christoffersen et al., 2006). Through such tactics activist hedge funds are capable of influencing large international corporations of


which they otherwise had o means to accumulate a significant enough block of shares (>5%) to exert enough influence. The main leaning out of this is that activist hedge funds, while being a small group, are the group of hedge funds which is most likely to have direct, measurable impact on share prices, fundamentally for two reasons: First, it is their strategy to increase the target’s share price through activism and second, they go public about it which makes it easier to track and measure their influence.

Overall, there is neither a clear definition of hedge funds, nor a complete list, and also there is no central record of the dealings of hedge funds. To a large extend it is just not possible to track which hedge fund invested into which stocks and when. This lack of data could be regarded as a considerable shortcoming to this research, but I argue that to the extent that hedge funds trade on the market anonymously, i.e. without anyone knowing when and into which stock they invest, hedge funds are not any different from any other institutional investor such as mutual funds. Arguably, they may have an impact due to the increased volume of trade, e.g. the market is more, and there are fewer and smaller arbitrage opportunities. However, overall, anonymously trading hedge funds act like other institutional investors, which, as Karpoff (2001) and Barger (2006) have shown, are unable to generate any abnormal returns despite their activist efforts. Therefore, there should be no notable significant impact on share price movements attributable to non-activist hedge funds1. On the other hand, some hedge funds specialize in activism, i.e. they are trying to actively influence the share price of certain stocks through different means, primarily through putting pressure on management to initiate changes. Such activist hedge funds do not act like normal, anonymous investors (Clifford, 2007; Boyson, 2007; Allaire et al. 2007). These activist hedge funds are those most relevant for this research since they are explicitly aiming to increase share performance.
There is one exception though, namely small manipulations due to have trading and rumours. Recently a claim has been made by an insider that hedge funds can and do manipulate share prices as needed, i.e. if they have a short position they can manipulate the price of the share to go down. Such claim hasn’t been substantiated yet and this kind of exerted influence is beyond the scope of this research.


Finally, some private equity firms act similar to activist hedge funds. Since many people in Germany can’t even tell the difference between the two and since their actions are often alike, i.e. they buy blocks of shares in companies in order to exert pressure onto them, I have included some private equity activism events in my analysis as well.

Since in this study I focus on the influence of hedge funds on share prices it is inevitable to take a small detour into the fundamentals of share prices. It is important to understand what drives share prices in order to understand the specifics of how a hedge fund could influence them.

Generally speaking, share prices express expectations. Owning a share is not so much a matter of owning a part of a company, but it is in most cases primarily a financial investment. Investors invest their money in shares in the expectation to get a return. As regards shares, there are two sources of income for the investor: dividend payments and an increase in the share price (capital gains). The price that an investor is willing to pay for a share is thus dependent on the investor’s expectations of future dividend payments and capital gains. Dividend payments depend of the firm’s potential to pay dividends which in turn depend on the firm’s earnings growth. While most shares are bound to deliver a return, they are not equally likely to do so. Investments in share aren’t equally risky and since shares aren’t the only possible investment form they compete amongst each other and against other investments such as bonds. A reasonable investor who has a large number of investments to choose from will require a premium for the risk he takes: The higher the risk, the higher the required premium. Thirdly, the value of a share should be based on its potential to generate future earnings. Such future earnings need to be evaluated. There are different evaluation methods to do so but all methods share one important common aspect. All evaluation methods are forward looking and therefore they are based on assumptions: Assumptions on earnings growth, assumptions on interest rates, and


assumptions on risk. As with all assumptions, an investor can never be certain about any of them. To actually convert expectations into quantifiable numbers, investors apply various valuation models. Two of the most famous models are the Dividend Discount Model (DDM) and Free Cash Flow Analysis (FCF). Like all other fundamental valuation methods the DDM and FCF valuation models are calculating the value of an equity based on income streams, assuming a yearly growth factor and discounting the income by a discount factor. The risk of the equity return in these models is encapsulated in the discount rate. These models may be overly simplistic and professional dealers are likely to rely on much more sophisticated models, but the underlying flaws are still the same. It is easy to see that expectations about income streams (regardless of whether they are dividends or cash flows), about growth rates and about risk are all forward looking assumptions and small changes to these assumptions often result in significantly higher or lower valuations. More complex models may be more sophisticated but they still rely on assumptions as input parameters. Quite often the current market value is used as a reference point against which one’s own valuations are benchmarked against. This is following one of the fundamental theories that “the market” is efficient and that the bulk of buyers and sellers, when in equilibrium, can’t be wrong. There is therefore a strong psychological (peer) effect underlying most assumptions which normally biases towards the market average.

Robert Shiller (2000), after analyzing the market of the 1990s, found that prices are sustained not by real fundamental factors but by investor enthusiasm. Many investors don’t buy shares because they believe in their real intrinsic value or future dividend payments, but because they are certain they can sell the shares to someone else at an even higher price. Simply speaking, “stock prices are driven by a self-fulfilling prophecy based on a large cross section of investors” (Shiller, 2000). Nowadays this effect is often referred to as the “greater fool” theory – there is always a greater fool who will pay even more for the share. The greater fool theory is also the reason behind stock market bubbles (Fisher and Statman, 2002).


If all investors relied on hard facts and fundamental evaluation methods than it would be unlikely that large bubbles could ever exist.

In 1973 Burton Malkiel published his book “A Random Walk down Wall Street” in which he introduced the “the random walk” theory. He suggested that a blindfolded chimpanzee throwing darts at the Wall Street Journal could pick a portfolio which would perform just as well as that of an expert. What he meant by this is that share prices seem to go up and down randomly. Over the long term the market will work efficient but in the short term it is impossible to predict if the price of a share will go up or down and hence it is not worse the time or money to even try to outperform the market. Hedge funds managers of course can not, by definition, agree to such theories since the sole purpose of a hedge fund to achieve just that, namely to outperform the market. I mention this theory for three reasons: 1. If the random walk theory holds, then also hedge funds should, over the long run, not be able to outperform the market. 2. If my research finds that shares of firms targeted by hedge funds outperform the market, then that would trigger a follow-up questions, namely if this is due to the hedge fund’s stock picking skill (contravening the random walk theory), due to the influence of the hedge fund (e.g. activism), or due to pure luck. 3. If my research finds that hedge funds do influence share prices (i.e. hedge funds are found to be the reason for share prices going up or down), than the share price movement would be proven to not be totally random which would open up arbitrage opportunities. If hedge funds investments into a share do have an influence, than such hedge fund deals, i.e. a hedge fund investing in a particular share, could become the trigger for other investors to also buy the same share since at that point it becomes likely that the share price is going up (or down if the hedge fund influence is negative). Such situation would than lead to a self-fulfilling prophecy since many investor jumping onto the wagon would increase demand for the share, resulting in a higher price.

In this paper I am analysing the influence of hedge funds on share prices. Now that we have reviewed the factors underlying share prices it is time to apply that understanding to the question underlying this research. If the hypothesis is


that hedge funds do have an influence on share prices then this automatically leads to another question: How is it possible that hedge funds influence the price of a share? The share price, after all, is the equilibrium of buying and selling prices which are based on assumptions around profitability, growth and risk. Common theory would conclude that hedge funds ability to influence the price of a share must stem from a direct influence on the underlying fundamentals (profitability, growth, risk). If none of the fundamentals change than the share price shouldn’t change, unless it’s a bubble. The question then is: Can hedge funds change the underlying fundamentals? If through activism a hedge fund could indeed make a firm more profitable, i.e. generate more free cash flow and generate more growth, than that would justify an increase in the share price. Klein et al. (2006) identify two strategies through which hedge funds can improve the target firm’s performance. First, hedge funds can alter the firm’s strategy, including the redirection of investments to more profitable (and more risky?) projects but also by divestment, i.e. selling of less-productive assets. Second, hedge funds can reduce agency cost by forcing the firm to reduce its excess cash holdings which can be achieved by changing the gearing, increasing dividends or paying extraordinary dividends or by buying back shares. Jensen (1986) specifically suggests that a firm can reduce its agency costs associated with excess cash by paying out dividends to shareholders or increasing debt and interest payments to creditors. Brav et al. (2006) find that the majority of activist hedge funds resemble value investors, i.e. they target companies which they believe are undervalued. They also find that the majority of hedge fund activism tends to fall into the second of Klein and Zur’s two categories, i.e. they target general changes (e.g., payout policy, excess diversification), rather than firm-specific issues (e.g., operational difficulty, sales slump) (Brav et al., 2006) and quite often they succeed with their plans, achieving, on average, 7%-10% abnormal return (Brav et al.,2006; Klein et al., 2006; Boyson et al., 2007). This means that in theory at least hedge funds are capable of improving a firm’s performance, and that this would lead to higher share prices of the target firm. However, there’s lack of evidence that hedge funds are achieving this in


practice. While there is evidence that hedge funds are associated with abnormal returns of the shares, underlying performance of these firms isn’t really improving as theory would expect. Brav et al. (2006) find that in two-thirds of all cases activist hedge funds are successful in attaining their activist objectives (as stated in their 13D filings) and they also find that hedge fund activism is associated with in improvement in return (ROE) in the target firm. However, they find this association to be weak and can’t confirm causality of the association. Zur et al. (2006) can’t even find a slight improvement in the accounting performance of the target firms. On the contrary they even find a decline in performance as measured in ROE, ROA and EPS in the year after the activism. There is therefore little to no evidence that hedge funds actually do improve target firm’s performance. Yet, many studies do find that hedge funds activism is associated with a 7% to 10% abnormal return of the target’s shares. These are two contravening facts which are hard to reconcile. There must be another reason why hedge fund activism leads to significant abnormal return. In fact, there are a couple of other factors which can help explain these findings. The first such factor is risk. As pointed out earlier investors demand a risk premium for their investments and accordingly fundamental valuation methods incorporate risk into the discount rate. Studies by Brav et al. and Zur et al. have only measured the change in the firm’s performance such as ROE but they haven’t considered risk. An increase of the share price could be explained by lower risk. Reduction of agency cost, divestments, redirections of investments – all factors which their studies founds that hedge funds were able to achieve – can all be linked to potentially lower overall risk of the firm. For example divestments of risky assets or risky operations would also decrease the overall business risk of the firm. Reduced agency cost can be linked directly to better decision making which can also result in lower overall risk. Maintaining the same ROE and the same growth while lowering the risk (and thus the discount rate) would result in a higher share price. I don’t have any data to support this theory but at least it gives one feasible explanation for the above discovered discrepancy. Yet, there are two more factors to consider. Secondly, it has been shown that hedge funds are responsible for up to 50% of all trade at the world’s major stock


exchanges (Braun, 2007; Schiller, 2006; Atzler 2005b; Campos, 2005). How trade volumes increased over time can best be illustrated by a few examples. In 1960, the average holding period for shares of a publicly listed company in the U.S. was seven years. By 1992 the average holding period had shrunk to two years and by 2006 was down to only seven months (Odland, 2006). In other words, the average annual share turnover for shares listed at the NYSE was: 12% in 1960 73% in 1987 86% in 1999 87% in 2005 (Allaire and Firsirotu, 2007) NASDAQ figures are even higher, for example the shares of Amazon.com turned over every seven days (Bratton, 2006). To a large extend these high levels of turnover are attributed to hedge funds. Such increases in equity trade levels certainly have a positive influence on the liquidity of the market, but there is also a downside. Schiller (2006) found evidence that frequent trading caused by hedge funds causes wild price fluctuations. There are reported cases of shares falling by more than 30% in a single week after hedge funds had gone after the company. Through extensive use of short positions or options hedge funds are powerful enough to put share prices under upward or downward pressure. Unfortunately, while long positions exceeding certain thresholds must be reported and are thus made publicly known, trades of options or short positions by hedge funds mostly take place in secret. Therefore no data for analysis is available and the exact extend to which hedge funds can influence share prices through such tactics is hard to estimate. Yet, there’s also the third additional factor through which hedge funds could possibly influence share prices: Psychology. As already discussed, all fundamental evaluation methods are forward looking and thus depending on expectations. These expectations are all assumptions and no investor or analyst can be certain that his assumptions are correct. If an investor sees that others are willing to pay a higher price for a stock, than that investor may be inclined to review and “adjust” his own assumptions which may then lead him to evaluate the share at a higher price. Shiller (2000) concluded that “People are prodded into the market, for example, by


the constant suggestion of 'the moral superiority of those who invested well' and the egodiminishing envy stirred by hearing that others have earned more in the market than they have in salary.” In other words, self-doubts and uncertainty paired with fear that one’s own assumptions could be wrong and could be resulting a financial loss or foregone gains lead to herd behaviour. Kiev (2002) simply boils it down to the fact that staying objective is difficult and that investors are “consumed with anxiety, selfdoubt, and frustration”. Hedge funds could use this to their advantage by luring other investors into thinking that they know something which others do not know. Greed and selfdoubt and anxiety would lead not all but some investors to believe that they are loosing out on a profitable opportunity, consequently they will buy shares as a result of which the share price rises. A very nice illustration of such anxiety is a very recent example from the German stock market where shares in Deutsche Post AG climbed 2.4 percent merely based on a rumour that a hedge fund might be building up a stake in Deutsche Post AG. According to Reuters (2007) traders stated that “Deutsche Post is jumping on rumours that TCI has already bought 3 percent of the company via the market” and “Obviously something is really cooking there. There are big two institutions in the U.S. that have been buying in the past few weeks, I don't know what their intentions are”. Whether the underlying motivation of the hedge fund is to use the psychological factor to lift up the share price and achieve a quick 2.4 percent profit or if the hedge fund actually is interested in a long term investment is hard to say but at the same time it is irrelevant. The fact that the mere rumour of a hedge fund investing is sufficient to increase the share price is proof that psychological factors play a considerable role and hedge fund could use this to their advantage.

So far I have presented evidence based on research from the U.S. that activist hedge funds are able to generate positive abnormal returns in target firms. I have also shown that the same studies find little to no evidence that these abnormal returns are related to real performance improvements of the firms. Finally, I have provided theories that reconcile the above discrepancy, i.e. I have also outlined


how hedge funds are theoretically able to boost share prices without improving the target firm’s performance. The final part of my research looks at historic market data to give real quantitative evidence of the influence of hedge funds on share prices. Since extensive research was already carried out for the U.S. market I have focused on the German market, which in many ways differs from the U.S. especially with regards to shareholder value and corporate governance, both of which are strongly linked to shareholder activism.

Regarding the quantitative analysis, there are some fundamental challenges to cope with. The first such challenge is that there is no clear definition of how hedge funds are defined. I have also already referred to the definitions made by Lake (2003) and Brav et al. (2006) and both give a correct but broad definition. There is, therefore, no clear definition of what a hedge fund is, and, since hedge funds aren’t regulated and, thus, aren’t obliged to report their dealings (with some exceptions, such as Schedule 13D filings) there also is no central database about hedge funds. A widely used and well renowned data source on hedge funds was the TASS database (formerly known as the CSFB/Tremont database), ran by Tremont Capital Management Inc. Allaire et al. (2007), Boyson et al. (2007), Clifford (2007), Brav et al. (2006) and Chany et al. (2005) all used TASS as a prime source for their research. Unfortunately Tremont has sold the database to Lipper and the database is no longer publicly available. Regardless of its unavailability Brav et al. (2006) have found that only 20-25% of the hedge funds which they had found manually were actually listed in the TASS database and this finding makes TASS an incomplete data source anyway. They attribute their finding to the fact that TASS was using self-reported data from hedge funds and not all hedge funds report themselves. This once again highlights the downside of lack of regulation and the difficulty to obtain reliable and comprehensive data for research. All of the above researchers have also relied on the Security Exchange Commission’s (SEC) Edgar database which holds all Schedule 13D filings. Although hedge funds are largely unregulated, section 13D of the Exchange Act of 1934 requires anyone who acquires more than five percent of a public company’s


shares to notify the SEC within ten days of crossing the five percent threshold, resulting in a Schedule 13D filing2. With regards to this Act, hedge funds are treated like any other investor and are thus equally required to file such disclosure document which makes the Edgar database a valuable source of data. In Germany both a similar rule and a similar database exist. Similar to section 13D of the Exchange Act, §21 of the German Securities Trade Act (Wertpapier Handelsgesetz, WpHG) requires anyone who crosses a 3%, 5%, 10%, 15%, 20%,25%, 30%, 50% or 70% threshold (in either direction) to notify the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) – the German equivalent of the SEC – within four working days. The BaFin stores such filings in a publicly available database3, similar to the Edgar database. However, unlike the Edgar database which keeps all filings, the German database run by the BaFin only lists current ownership and filings related to them. This means, it does not keep filings where, for example, a fund exceeds the 3% threshold but later drops below it again. Once an investor drops below the 3% threshold, old filings are deleted and no further record will be found in the database. Since the BaFin only keeps records of current ownership structures, historic findings are not available, which in the case of hedge funds who trade frequently, is a considerable downside. Given the lack of a central data source on hedge funds I used phased approach to gather the relevant data. Phase one was primarily aimed at compiling a list of hedge funds, particularly those who are known as activist funds and those who trade on the German market. I used four source of information to compile such a list. First, I used the Thomson One Banker database which includes a deals section. The deals section list transactions where one institution bought blocks of shares of another company. I search the deals database for transactions where the target was a German company and the buyer was classified with any of the following industry
This 5% threshold is the reason why Klein et al. refer to a 5% stake in their definition of hedge fund activism 3 Available at: http://www.bafin.de/database/AnteileInfoWeb/


codes: SIC 6282, 6722, 6799, 7389; NAIC: 523910, 523920, VEIC: 9000, 9250, 9299.These industry codes cover financial institutions excluding retail banks. This search already turned out some relevant deals as well as names of hedge funds and their targets. Secondly I used the Factiva news database to search for news relating to Germany (German and English language), including the words “hedge fund”, “hedge fond” or “hedge-fond”. I noted down all news reports of hedge funds buying, or intending to buy blocks or shares. I also recorded the names of all reported hedge funds. Third I used various hedge fund related websites to gather the names of the biggest, most active and known activist funds. Fourth: I ran searches on the BaFin database using names of known targets and acquirers which I had gathered from the previous three sources. The BaFin database would give me current ownership structure which in some cases led to new names of other hedge funds. From all four sources together I was able to gather 400 names (including synonyms) of hedge funds as well as 30 names of individual investors which own or manage hedge funds. While this list isn’t exhaustive, it is very unlikely that any major hedge fund that could have a significant influence on the market would be left out from my list. Phase two of the data gathering process was aimed at finding all relevant German deals where any of these hedge funds or investors were involved. Again, I turned to the Thomson One Banker database searching for any deals with German targets where the buyer matched any of the 400 names. I also used the Factiva news database to search for articles concerning Germany which mentioned any of the 400 hedge fund names or any of the 30 individuals. From that search I was able to generate a list of 46 relevant deals. In phase three of the research I retrieved German market index data (DAX, MDAX, SDAX, TecDAX) for the period from 1/1/2004 to 31/7/2007 from the Datastream database. I also retrieved the share prices of all target companies involved in those 46 deals for the same period. I then used the Osiris database to generate lists of peer companies for each target (using the Osiris peer analysis function) and for each peer retrieved share price information.


The final data was a comprehensive list of the German market index, share prices of all involved target companies as well as share prices for all peers (industry groups) for each target. Based on research from the U.S. market (Brav et al.,2006; Klein et al., 2006; Boyson et al., 2007) which showed that activist hedge fund on average deliver abnormal returns of 7%-10%, the hypothesis for the German market was that hedge funds would have a similar impact on German share prices. If hedge funds had a positive influence on share prices then the positive impact should occur near to the time of the investment (day 0) and should not reverse thereafter. The data that I used was based on news reports or filings in the Thomson One Banker database or in the BaFin database. In all cases I assumed that the deal was not reported on the same day that it took place. The BaFin requires deals crossing a threshold to be reported within 4 days. At the same time information about the (planned) deal could have leaked to the market several days before the deal actually took place. To reflect the delay in reporting and possible leakage, I have used day0 minus 10 days (T-10) as the reference point for share price performance. I consider T-10 as the time at which the target share price is free from influence from the hedge fund deal. In order to measure share performance, and to validate if target companies’ shares outperform the market, I have used a [-10,+30] day interval around day 0 (reported date of the deal). I compare the target share price [-10,+30] buy-and-hold performance against the market index buy-and-hold performance (indexes used are DAX, MDAX, SDAX and TecDAX) as well as against peer industry buy-andhold performance for the same perdiod. If hedge funds do have a positive influence on share price performance than the target stocks should outperform the market and their peers over the [-10,+30] period. For control purposes I also looked at alternative time intervals [-30,+30], [-10,+60] and [-100,+100] to control for any unusual events. As Kahan and Rock (2006) point out, hedge funds are generally regarded as very short term investors and their short investment horizons are an issue of controversy. This is mainly because critics claim that hedge funds short-termism leads to short-term gains which come at the expense of real long-term shareholder value. If this was really


the case than I would expect to see that any abnormal return that hedge funds generate upon their engagement would reverse shortly after. There would be a short-term increase in the share price but as other investors realize that there really is no improvement to the underlying fundamentals, the share price should return back to its original state. By applying a wider timer interval such as [-10,+60] and [-100,+100] I can filter out such effects. If share outperform in the [-10,+30] interval but perform average over a [-100,+100] interval this would be a strong indicator for only short-term improvement.

The hypothesis of my research is that similar to the U.S. also in Germany hedge funds are associated with positive abnormal returns of target firm’s shares. Since other research has shown that, unlike common believe, hedge funds are not short term investors (Bratton and Williams, 2006), my hypothesis is that abnormal returns of shares associated with hedge funds are not reversed in subsequent periods. Proof of this hypothesis would be linked to quantitative analysis showing significant (95% confidence level) abnormal returns of target firm’s shares over a [-10, +30] as well as a [-10, +60] interval. The [-10, +30] interval is most relevant to identify abnormal returns after hedge fund activity become publicly known. If an abnormal return over the [-10, +60] interval is lower than over the [-10,+30] period then that is an indicator that the abnormal return is short-term only and not based on real fundamental improvement. Finally, an abnormal return over the [-10, +30] interval without any abnormal return over a [-30,+30] period would indicate that the target firm’s share took a dip before the hedge fund invested and that the hedge fund is only a free rider exploiting the situation. Why a significant abnormal return over the [-10,+30] period alone does not sufficiently prove my hypothesis is best illustrated with the three below diagrams. Only the first diagram shows a real share price improvement attributable to the hedge fund. The other two examples show short-term improvement only and the free rider example where there is an increase in the share price but not caused by


the hedge fund. Rather, the hedge fund is acting opportunistically, speculating that after a dip the share price will recover.
115 110

100 95 90 -90 -60 -30 0 +30 +60 +90

Hedge Fund

Figure 2 - Real performance improvement

A real improvement to the underlying fundamentals of a share would result in a rising share price without subsequent reversal. The improvement is resulting in an above average rise and thereafter the share performance “normally”. This is shown in Figure 2 above.
110 105 100 95 90 -90 -60 -30 0 +30 +60 +90 Hedge Fund Markt

Figure 3 - Short-term speculative spike

If the share price increase is only short-term, meaning there is no real change to the firm’s performance then the initial jump in the share price is expected to reverse in a subsequent period. This is shown in Figure 3 above.


105 100 95 90 85 80 -90 -60 -30 0 +30 +60 +90 Hedge Fund Markt

Figure 4 - Free rider

Lastly, not all share price movements are triggered by the activist hedge fund. In fact, most share price changes have other reasons. It might therefore be likely that a share performs above the market over the [-10, +30] period but only because there was a short-term downwards dip which reversed shortly after. Should a hedge fund buy during that dip, then the analysis would show a positive abnormal return, however, this is not causally linked to the hedge fund. Figure 4 above is an example and a visual analysis of the share price performance as well as referring to a longer term interval [-30, +60] can help identify and isolate such cases.

My analysis of 46 occasions of hedge fund activism shows a result which is utterly different from those in the U.S. Shares of target firms outperform the market index only by 2.2% on average (buy-and-hold return over the [-10, +30] period). The median value for the same period is even only 1.3%. This performance is statistically not significantly different from the market index at a 95% confidence level. During the whole observation period (01/2004 until 07/2007) the DAX index had an average 40 day (equivalent to the [-10, +30] interval) return of 2.2% (median 2.8%) while the target firm’s shares over the [-10, +30] period achieved 4.8% (mean) and 3.8% (median). However, the standard error for the sample was 0.023 (or 2.3 percentage points) and the difference therefore is not statistically significant. Over longer periods [-10, +60] the target shares buy-and-hold return is equivalent to the market (mean 0%, median 0.1%) and over the even longer


[-100,+100] period target shares even under perform against the market with negative abnormal return of -0.1% (mean) and -6.2% median. The hedge funds target share performance against industry peers equally is not significantly different. Abnormal returns are only 1.3% (mean) and negative 0.5% (median) over the [-10, +30] interval with abnormal returns ranging from negative -2.6% to 1.5% over the longer intervals. The overall results are presented in Table 1 (abnormal return against market index) and Table 2 (abnormal return against peer group) below.
(-10,30) Average Median 25th percentile 50th percentile 75th percentile Standard Error (-30,30) (-10,60) (-100,100)

2.2% 1.3% -5.5% 1.3% 7.1% 0.023186

2.6% 1.0% -5.6% 1.0% 10.0% 0.025416

0.0% 0.1% -7.3% 0.1% 9.2% 0.028297

-0.1% -6.2% -13.2% -6.2% 15.8% 0.040973678

Table 1 - Abnormal return against market index

Average Median 25th percentile 50th percentile 75th percentile Standard Error

1.3% -0.5% -6.5% -0.5% 7.0% 0.02291

1.6% 1.6% -8.6% 1.6% 8.5% 0.025014

-1.3% 1.5% -10.9% 1.5% 8.9% 0.02805

-2.6% -1.0% -22.6% -1.0% 19.7% 0.039742334

Table 2 - Abnormal returns against peer group

At the 75% percentile target firm’s shares perform well and significantly outperform the market and peer group. Here I also want to highlight that abnormal returns are increasing over longer periods. This is a strong indication that while many times hedge funds fail, in same cases they actually do achieve to deliver sustainable long term improvements to overall operating performance. Figure 5 and Figure 6 show the share price for EM.TV AG and SGL Carbon AG over a six months period around hedge fund activism. The three vertical lines mark the start, middle and end of the [-10, +30] interval. The most left line marks t-10, the middle one t-0 and the right one t+30. The two straight lines between the -10 and +30 markers are the projected market and peer performance as projected from t-10. If the share price is above these lines then the share is delivering


positive abnormal returns and if the share price is below these lines then it is delivering negative abnormal returns. Figures 5 and 6 are examples of hedge fund activism associated with positive abnormal returns without reversal in subsequent periods.
4 3.5 3


Figure 5 – Successful activism: EM.TV AG


12 11
10 9 8

Figure 6 – Successful activism: SGL Carbon AG

Figure 7 below illustrates the opposite case where hedge fund activism backfired and was ill perceived by the market as the result of which the share price dropped substantially by 17%.


24 22
20 18 16 14

Figure 7 – Failed activism example: KUKA AG

In chapter 3.4 on page 15pp. I have given the example of a rise of the share price of Deutsche Post merely based on rumours that a hedge fund bought a 3% stake. Figure 8 shows the share price performance around this date. This figure is a wonderful example for two reasons. First, it correlates nicely to Figure 3 on page 25 and to the theory behind the graph which I presented earlier. There is a short spike going up from € 22.85 on 24/4/2007 to € 25.63 on 27/4/2007. This spike is a 12% rise in just three days. Shortly thereafter the price falls back to €23.4. This is a typical example for a speculative share prince increase which is not underlined by any changes to the underlying fundamentals. Secondly, this graph also illustrates that the sharp share price rise started a few days before day 0, the day of the official announcement. This strongly indicates that information was leaked to the market. Such leakage is the reason why for analysis I am using the [-10, +30] interval instead of a [0, +30] interval. Using the latter would lead to wrong conclusions as can be seen from the graph in Figure 8.


26 25 24 23 22 21

Figure 8 - Short term spike: Deutsche Post AG

Similarly, Figure 9 correlates well to Figure 4 on page 26 which I used to illustrate the free rider strategy. There’s a downward dip in the share price of Medion AG upon which the hedge fund reacts by increasing its stake to 10%, speculating that the share price would recover, which it did. While such case would show up as a significant abnormal return over the [-10, +30] period, it is highly unlikely that the hedge fund helped improving Medion’s performance. Yet, this does not mean that the price increase is not related to the hedge funds action. Its move to increase its stake in Medion to 10% could very well have triggered other investors and analysts to review their valuations. Maybe in fact Medion was undervalued, the hedge fund spotted this and other investors followed. The cause and effect relationship in this case is hard to identify but it seems likely that there is an association between the price increase and the hedge fund action.
13 12 11 10 9

Figure 9 - Free rider example: Medion AG


The above example could be described as an event driven strategy; the hedge fund responded to the temporary share price decline. Figure 10 is another example of even driven strategy. In this example Rinol AG was in financial distress. Around the date of hedge fund action two major events took place. Firstly, there was a shareholder meeting at which shareholders approved the presented turnaround strategy and secondly, banks granted additional loans to Rinol AG. The share price increase is primarily attributable to the recovery of Rinol, shareholders agreeing to the turnaround plan and banks granting additional financing. The hedge fund was only a passive speculator in this case (maybe having insider information).
8 7 6 5 4

Figure 10 - Event driven (distress) Example: Rinol AG

Another illustration of an event driven strategy is shown in Figure 11 below. In this event Schering AG was a takeover candidate and bids by the acquirer were already made (hence the sharp share price increase before the hedge fund action). The involved hedge fund was speculating for an even higher bid by the acquirer which in the end was successful but only marginally.



79 69 59 49

Figure 11 - Merger arbitrage example: Schering AG

Finally, there are also cases where even active activism by a hedge fund has virtually no impact at all on the share price. Figure 12 is such a case. Techem AG’s share price was flat while the market and peers were growing at normal rates. This can be explained by the fact that the share price had already gone up significantly from around € 38 to € 56. While the hedge fund claimed that the company was underperforming and that the share price needed to rise, the market had a different view and the hedge fund activism was not successful.

59 54 49 44 39


Figure 12 - No market reaction: Techem AG

Only in 15 out of 46 cases (33%) there was a significant (>5%) positive abnormal return over the [-10, +30] observation period. In 5 out of these 15 occurrences the positive abnormal return was reversed in subsequent periods. Out of the 10 remaining cases for two the rise in the share price appears to be attributable to


external factors (e.g. relieve of the distress situation in the case of Rinol AG). This means that there are only 8 out of 46 cases where hedge funds had a long lasting positive influence on the target firm’s share price. Even for the 8 remaining cases, there is no clear evidence that the hedge funds are the source of the share price increase. It is equally possible that hedge funds were just stock picking the right shares at that time (8 out of 46 could be pure luck). The mean abnormal return of the whole sample is only 2.2% measured against the market index and 1.3% when measured against peer groups, and both values are not significantly different from 0% at a 95% confidence level. Overall, there is therefore little to no evidence that hedge funds are a source for share price increases or real improvements of the target firm’s performance (which should be reflected in the share price) as I had originally anticipated.

My findings give no proof of lasting share price improvements attributable to hedge funds. These results imply that, unlike in the U.S., hedge funds in Germany are unable to facilitate any kind of change that would result in real improvements of underlying fundamental performance criteria which would increase the value of the target firm. My findings also differ from the findings of Brav et al. (2006), Klein et al. (2006) and Boyson et al. (2007) in the U.S. who all found evidence of positive abnormal return attributable to activist hedge funds. A simple explanation for this would be that my sample size was much smaller than those of the U.S. studies, but I don’t believe that this is the real reason. It seems more likely that market differences are the real reason behind the different findings. Roddy Campbell in his book “European event and arbitrage investing” stipulated several laws of which the first law reads: “arbitrage has never worked in countries that have never been ruled by Britain” (Campbell, 2003). He explicitly includes most European countries, including Germany in the list of countries never ruled by Britain. The truth behind this is indeed that financial markets in Britain and in the U.S. have a different tradition than for example in Germany or in Japan. Corporate funding in the U.S. has always been based on equity whereas debt was (and in many cases still is) the main source of funding for firms in


Germany (Brealey, Myers, Allen, 2006). Consequently, the U.S. has a much stronger sense for corporate governance and shareholder value and even shareholder activism has a long history. In contrast, in Germany managers, especially in smaller companies, are much less used to the idea of shareholder value and stakeholder value is much more common. This can be attributed to the fact that Germany puts a much stronger emphasis on co-determination which weakens the influence that shareholders have. Shareholder activism is therefore more difficult and rather uncommon as the shareholders are only one part of a long list of stakeholders. The first obstacle for activist hedge funds is therefore to get the firm’s management to listen. There are prominent examples in Germany where hedge funds were successful (e.g. Deutsche Börse) but there are also other prominent cases were the target firm’s management just ignored whatever the hedge funds were demanding (e.g. CeWe). Even if the firm’s management buys in to the hedge funds ideas, this doesn’t mean that the rest of the market will appreciate such involvement. Ever since Franz Müntefering, former German Federal Minister of Labour and Social Affairs called hedge funds locusts, are investors scared that a hedge funds involvement could actually lead to poorer long-term performance. Such anxiety can lead scared investors to sell their shares upon receiving information that a hedge fund is planning to exert influence on a firm. While I don’t have evidence for my theory, I do believe that differences in the financial market and in corporate governance are the reason why hedge funds in Germany are less successful than in the U.S. in regards to increasing target firm’s share prices. My research has primarily focused at long-term improvements of share prices and I have only briefly touched upon the short term effects. I have given an example of Deutsche Post AG were there was a very short-term spike in the price of the share but I could only do so because information about this event was in the news. I am certain that there are many cases were hedge funds are manipulating share prices by small percentages over a very short period of time. Jim Cramer, a former hedge fund manager has recently hinted to such practices in an interview with TheStreet.com (New York Times, 2007), indicating that hedge funds could manipulate share prices to go up or down as needed. The SEC has also recently announced that it finds a large amount of suspicious trading, indicating insider


deals (SEC, 2006). John Coffee believes that hedge funds are the reason behind the increase in insider trading. He states that “hedge funds are unregulated, and their managers are not monitored as closely by compliance officers and counsel […]. Because they trade in larger increments than more diversified institutional investors, they will pay more for useful tips”. (Bingham McCutchen, 2006). While both sources are referring to the U.S. market I suspect that also in Germany hedge funds are actively involved in such manipulation. I dare to say that in some cases (e.g. Deutsche Post AG), hedge funds pretend to be activist funds to make the market believe that they will add value to the target’s share in order to benefit from a short-term price increase. By the time the share price has fallen again, the hedge fund will have sold its stake already, taking with it a small but profitable 1% or 2% gain. Unfortunately, it is very hard to prove such suspicions due to the fact that hedge funds are not regulated. As long as their stake remains below the 3% threshold at which they would have to report their stake to the BaFin, hedge funds can trade anonymously and only go public if it suits their need, e.g. they can buy a 2.8% stake, announce this fact, wait for the price to rise and then sell their stake in silence. Since hedge funds don’t have to report their dealings it is almost impossible to get the necessary data to substantiate suspicions such as the one that I have raised. However, overall I can conclude that hedge funds in Germany have a weaker position than they have in the U.S. Their impact on the market is felt much less and their ability to drive corporate change is limited by German management’s stance on shareholder value and corporate governance. And while there are a few well publicized hedge fund related events, most hedge fund deals in Germany go unnoticed and seem to be market neutral.


Allaire, Yvan and Firsirotu, Mihaela E., 2007, “Hedge Funds as Activist Shareholders: Passing Phenomenon or Grave-Diggers of Public Corporations?‖. Available at SSRN: http://ssrn.com/abstract=961828 Atzler, Elisabeth, 2005a, “Hedge-Fonds fordern Unternehmen heraus”, Financial Times Deutschland, 5 September, 2005 Atzler, Elisabeth,2005b, “Hedge-Fonds machen Tempo an den Börsen“, Financial Times Deutschland, 8 September, 2005 Barber, Brad M., 2006, “Monitoring the Monitor: Evaluating CalPERS' Shareholder Activism”, Working Paper. Bingham McCutchen LLP, 2006, “Hedge Funds Newsletter”, Bingham McCutchen LLP, Fall 2006 Boyson, Nicole M. and Mooradian, Robert M., 2007, “Hedge Funds as Shareholder Activists from 1994-2005‖. Available at SSRN: http://ssrn.com/abstract=992739 Bratton, William W., 2006, “Hedge Funds and Governance Targets”, Available at SSRN: http://ssrn.com/abstract=928689 Braun, Christian, 2007, “Smoke, mirrors and Hedge Funds”, Ethical Corporation, July 7, 2007, http://www.ethicalcorp.com/content.asp?ContentID=5231 Brav, Alon, Jiang, Wei, Partnoy, Frank and Thomas, Randall S., 2006, “Hedge Fund Activism, Corporate Governance, and Firm Performance‖. ECGI - Finance Working Paper No. 139/2006 Available at SSRN: http://ssrn.com/abstract=948907 Brealey, Richard A., Myers, Stewart C., Allen, Franklin, 2006, “Corporate Finance”, 8th Edition, McGraw-Hill Briggs, Thomas W., 2007, “Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis”. Journal of Corporation Law, Vol. 32, No. 4, 2007 Available at SSRN: http://ssrn.com/abstract=911072 Campbell, Roddy, 2003, “European event and arbitrage investing”, as part of “Evaluating and Implementing Hedge Fund Strategies”, 3rd Edition, Euromoney Books Campos, Roel C., SEC Commissioner, Speech to the Managed Funds Association, July 12, 2005 Chany, Nicholas T., Getmansky, Mila, Haas, Shane M. and Lo, Andrew W., 2005, “Systemic Risk and Hedge Funds‖. MIT Sloan Research Paper No. 4535-05 Available at SSRN: http://ssrn.com/abstract=671443 Clifford, Christopher, 2006, “Value Creation or Destruction? Hedge Funds as Shareholder Activists‖, Available at SSRN: http://ssrn.com/abstract=971018 Cox, Christoper, 2006, Testimony concerning the regulation of hedge funds (before the U.S. Senate Committee on Banking, Housing and Urban Affairs), July 25 2006, Available at: http://www.sec.gov/news/testimony/2006/ts072506cc.htm


Dougherty, Carter, 2007, “Economic power to study growing influence of hedge funds”, International Herald Tribune, February 10, 2007, available at: http://www.iht.com/articles/2007/02/10/europe/web.0210G7.php Financial Times, 2005, “Hedge funds hold a quarter of Germany's blue-chips”, Financial Times, 2 September, 2005 Financial Times Deutschland, 2005, “Hedge-Fonds machen Tempo an den Börsen“, Financial Times Deutschland, 8 September, 2005 Fisher, Kenneth L., Statman, Meir, 2002, “Blowing Bubbles”, The Journal of Psychology and Financial Markets, 2002, Vol. 3, No. 1, Pages 53-65 Gabelli, Mario J., 2007, “The History of Hedge Funds – The Millionaire’s Club”, GAMCO Investors Inc., retrieved on August 1, 2007. Available at: http://www.gabelli.com/news/mario-hedge_102500.html Garbaravicius, Thomas, Dierick, Frank, 2005, “Hedge Funds and Their Implications for Financial Stability”, European Central Bank, Occasional Paper Series, No. 34, August 2005 Gillan, Stuart L. and Starks, Laura T., 2007, “The Evolution of Shareholder Activism in the United States”. Available at SSRN: http://ssrn.com/abstract=959670 Goetzmann, William N., and Stephen A. Ross, 2000, “Hedge funds: Theory and performance”, Working Paper, Yale University and Massachusetts Institute of Technology Hu, Henry T.C. and Black, Bernard S., 2007, “Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership‖. Journal of Corporate Finance, vol. 13, pp. 343-367, 2007 Available at SSRN: http://ssrn.com/abstract=874098 Hu, Henry T.C., and Black, Bernard, 2006, “Hedge funds, insiders, and empty voting: Decoupling of economic and voting ownership in public companies”, Working paper, University of Texas Law School International Financial Law Review, 2005, “Germany to reward active shareholders”, International Financial Law Review; Nov2005, Vol. 24 Issue 11, p1010, 2/3p Jensen, Michael C., 1986, Agency costs of free cash flow, corporate finance, and takeovers, “American Economic Association Papers and Proceedings‖, May 1986, pp. 323-329. Kahan, Marcel and Edward Rock, 2006, “Hedge Funds in Corporate Governance and Corporate Control”, New York University working paper. Karpoff, Jonathan M., 2001, “The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings”, Working Paper. Kahn, Charles, and Andrew Winton, 1998, “Ownership Structure, Speculation, and Shareholder Intervention”, Journal of Finance 53, 99-129.


Klein, April and Zur, Emanuel, 2006, “Hedge Fund Activism”, AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Paper Available at SSRN: http://ssrn.com/abstract=913362 Kiev, A., 2002, “The psychology of risk mastering market uncertainty”, New York, NY, John Wiley & Sons Lake, Ronald A., 2003, “Evaluating and Implementing Hedge Fund Strategies”, 3rd Edition, Euromoney Books McWhinney, Jim, 2005, “A Brief History of the Hedge Fund”, Investopedia, November 8, 2005, Available at http://www.investopedia.com/articles/mutualfund/05/HedgeFundHist.asp New York Times, 2007, “Jim Cramer’s Guide to Market Manipulation”, DealBook, New York Times, March 20, 2007, available at: http://dealbook.blogs.nytimes.com/2007/03/20/cramer-market-manipulator/ Odland, Steve, 2006, Keynote address to the National Association of Corporate Directors, October 16 2006, available at: http://www.businessroundtable.org/taskForces/taskforce/document.aspx?qs=7 085BF159F949514481138A77EC1851159169FEB56A36B9AE Reuters, 2007, “Deutsche Post up on talk of TCI stake build”, Stock New Europe, Reuters, June 14, 2007 Rose-Smith, Imogen, 2006, “The Hedge Fund 100”, Institutional Investor’s Alpha, Alpha Research Centre, June 2006 Schiller, Ben, 2006, “Hedge funds and private equity - Trading down corporate responsibility”, Ethical Corporation, November 14, 2006. http://www.ethicalcorp.com/content.asp?ContentID=4681 SEC, 2006, Testimony of Linda Chatman Thomson, Director Division of Enforcement U.S. Securities and Exchange Commission, SEC, December 5, 2006, available at: http://www.sec.gov/news/testimony/2006/ts120506lct.pdf Shiller, Robert J., 2000, “Irrational Exuberance”, Princeton, N.J.: Princeton University Press, 2000 Süddeutsche Zeitung, 2007, “Finanzinvestoren”, Süddeutsche Zeitung, 29 June, 2007


Target 10tacle Balda Bertrandt BHW Borussia Dortmund CeWe Commerzbank Deutsche Börse Deutsche Börse Deutsche Post Deutsche Telekom Deutsche Telekom Drillisch EM.TV EM.TV Evotec Freenet

Hedge Fund Avenue Capital Guy Wyser-Pratte Absolute Capital Management Absolute Capital Management Och-Ziff MarCap (M2 Capital) Tosca Fund Atticus TCI TCI Laxey Blackstone Montrica Centaurus MarCap (M2 Capital) Absolute Capital Management Hermes

Day 0 13/10/2006 17/01/2007 28/12/2005 23/12/2005 27/06/2006 31/01/2007 03/08/2005 24/02/2007 09/05/2006 27/04/2007 03/11/2006 24/04/2006 09/03/2007 11/10/2004 09/06/2007 02/07/2007 25/06/2007

Comments stake increased to above 8% increased stake to 5.39% stake REDUCED from 6.5% to 3.7% 3% stake 7.56% has 9%; demands extraordinary dividend also Lansdowne; merger arbitrage (hoping for takeover) pressure to make changes and increase dividend 10% stake speculation that TCI would invest Activism starts here 4,5% 6.17% 5.22% stake reported 3% stake 3.037% Hermes (holding 5.2%) pushing for divestment, support from ACM bought 3% and announced planned increase to 5% and expectation of 6Euro dividend 3.3% stake 5.13% Carlyle and Permirar want to takeover Valentino buys 5% stake stake increased to 7% 5.29% stake 5.5% stake stake increased to 10% (early January)

Freenet Gerry Weber Heidelberger Druck Hugo Boss (Valentino) Karstadt KUKA (IWKA) KUKA (IWKA) KUKA (IWKA) Medion Medion Mistral Media AG Pixelpark AG Praktiker Praktiker Praktiker Rinol

Absolute Capital Management Absolute Capital Management Centaurus Carlyle Wellington Management Company Guy Wyser-Pratte Guy Wyser-Pratte K Capital Partners Orbis Orbis Absolute Capital Management Absolute Capital Management Eton Park Capital Management T. Rowe Price Eton Park Capital Management Highbride

24/05/2007 22/02/2007 04/07/2007 16/05/2007 01/03/2007 28/10/2003 17/10/2005 07/05/2005 24/01/2005 21/01/2006 22/12/2006 29/03/2007 13/04/2006 10/05/2006 03/07/2006 10/08/2005

stake 6.6% second hedge fund to invest, stake 5.24% stake REDUCED from 6.6% to 2.4% Highbride plans to TAKE OVER Rinol (who is in distress situation) 77 euro bid on march 13 2006, price jump already before HF announcement due to bid, latest bid 86 K Capital and others have bought 15% stake (total, all three) stake REDUCED to 2.8% stake 5% 11% stake

Schering SGL Carbon SGL Carbon TAG Tegernsee TAG Tegernsee

Citadel K Capital Partners K Capital Partners Absolute Capital Management Taube Hodson Stonex

12/04/2006 19/05/2005 24/06/2005 18/08/2006 07/09/2006



Elliot Associates


stake increased to above 10% and to 15% one week later first report 3 Jan; further activism mid March 2007 and June 26 2007; quadrupled dividend announced Feb 2007 3% over last 2-3 months various hedge funds SHOWING INTEREST, not actually buying 3% stake since February 21

Techem TUI TUI Vivacon

Elliot Associates Absolute Capital Management various Absolute Capital Management

03/01/2007 12/03/2007 13/08/2004 02/03/2007



15 14.5 14 13.5 13 12.5 12 11.5 11 10.5 10


12 11 10 9 8 7 6 5 4


14 13 12


10 9 8 7


2.7 2.5 2.3 2.1 1.9 1.7

Borussia Dortmund

49 44 39 34 29


24 22 20 18




67 62 57 52

Deutsche Börse


90 85 80 75 70

DeutscheBörse (2)

60 55


26 25 24 23 22 21

Deutsche Post



15 14 13 12 11 10

Deutsche Telekom

16 15.5 15 14.5 14 13.5 13 12.5 12 11.5 11

Deutsche Telekom (2)

81 76


66 61 56

46 41


10 9.5 9 8.5 8 7.5 7 6.5 6 5.5 5


4 3.8 3.6 3.4 3.2 3 2.8 2.6 2.4 2.2 2


5 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4

EM.TV (2)


27 25 23


19 17 15

27 25 23 21 19 17 15

Freenet (2)

24 22 20 18

Gerry Weber



59 54 49 44

Hugo Boss


24 23 22 21 20 19 18 17 16 15 14


25 24 23 22 21 20 19 18 17 16 15

KuKa (2)


31 29 27 25 23


21 19

19 18 17



13 12 11 10

14 13.5 13 12.5 12 11.5 11 10.5 10 9.5 9

Medion (2)


8 7 6 5 4 3 2 1


26 24 22 20 18


28 26 24 22

Praktiker (2)



27 25 23 21 19

Praktiker (3)


9 8.5 8 7.5 7 6.5 6 5.5 5 4.5 4




79 69 59 49


13 12.5 12 11.5 11 10.5 10 9.5 9 8.5 8


14 13

SGL (2)

11 10 9 8

11 10.5 10 9.5


8.5 8 7.5 7


10.5 10 9.5 9 8.5 8 7.5 7

TAG (2)



49 44 39 34


Techem (2)

58 56 54 52 50 48 46


17 16 15 14 13



24 23 22 21 20 19 18 17 16 15 14

TUI (2)

34 32 30 28


24 22 20 18


30 28 26 24 22


20 18

6 5.5


4.5 4 3.5 3

2 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1



1.4 1.3 1.2 1.1 1



18 17.5 17 16.5 16 15.5 15 14.5 14 13.5 13



Relevant hedge funds and search terms used for the database research: 3I DEUTSCHLAND GMBH BC Partner GmbH 3i Group Investments BC Partners Holding 3i Group BC Partners Aberdeen Asset Management Asia Bessent Capital Aberdeen Asset Management Co BIG-Heimbau AG Aberdeen Asset Management Blackstone Aberdeen Asset Managers Growth Capital Blackstone Capital Partners IV Aberdeen Asset Managers Private Equity Blackstone Capital Partners Aberdeen High Income Trust Blackstone Capital Partners V Aberdeen Murray Johnstone Private Equity Blackstone Group International Aberdeen Preferred Income Trust Blackstone Group International Aberdeen Preferred Securities Blackstone Group Aberdeen Private Investors Blue Ridge Capital Aberdeen Private Investors -Investment Management Blue Wave Business BlueBay Asset Management Aberdeen Property Investors AS BlueCrest Capital Aberdeen Property Investors Nordic AB BlueMountain Aberdeen Property Investors Services Boussard & Gavaudan Aberdeen Property Investors UK Boussard & Gavaudan Gestion Aberdeen Real Estate Fund Finland Boussard & Gavaudan Holding Aberdeen Trust Holdings BP Capital Management Absolute Capital Management Bradesco Asset Management a Absolute Capital Management Holdings Brevan Howard Accipiter Capital Management Bridgewater Affinity Equity Partners Bridgewater Associates Inc. Affinity Equity Partners Brummer & Partners AHL Buchanan Capital Holding AG AIM Trimark Buchanan Capital Management Angelo Gordon Buchanan Capital Partners GmbH Angelo Gordon & Co Bulldog Investors Antilooppi Oy Bulldog Investors General Partnership Appaloosa Management Burton Capital BV Appaloosa Mgmt Burton Capital Managament AQR Capital Burton Capital Management / BCM Asset Value Investors Callahan Associates International Atticus Capital Callahan Associates Intl Atticus Capital CambridgePlace Investment Management Atticus Global Fund Cannell Capital Atticus Investments Assets Inc Cantillion Capital Management Atticus Management Cantillon Atticus Mauritius Capital Growth Financial August Broetje GmbH Capital Growth Fund Avenue Capital Capital Growth Partners Avenue Capital Group Capital Management Advisors Group Barclays Global Investors Cardinal Value Equity Partners Barington Capital Group Carl Icahn BC European Capital Carlos Slim Helu


Carlyle Group Caxton Associates Celanese AG Celanese Europe Holding GmbH Celanese Europe Holding GmbH & Co KG Celexa Group Centaurus Capital Centaurus Capital Centaurus Energy Cerberus Capital Cerberus Capital Management Cerberus European Investments Cerberus Investment Cevian Capital CeWe Color Holding AG CGA Insurance Brokers Chap-Cap Activist Partners Chap-Cap Partners 2 Chapman Capital Cheyne Capital Cheyne Capital Management Children's Invest Fund Mgmt Children's Investment Fund Management Children's Investment Fund Mgmt Cholet Acquisitions Citadel Citadel Investment Group Clarium Capital CMP Acquisition Corp CMP Group Inc CMP Holdings CMP Investments CMP Partners Coller Capital Convexity Copper Arch Capital Costa Brava Partnership III, CQS Cyrus Capital Partners D.E. Shaw David Jones DE Shaw Deutsche Annington Immobilien Deutsche Asset Mgmt Grp Diamond Hill Focus Long-Short Fund Dillon Read Dividend Capital Trust Inc Dolphin Dometic International AB Drive Sarl Dubai Financial

Dubai Holding Edward Lampert Egerton Capital Elliot and Deka Elliott Associates Elliott International Elliott Management Corp Enhanced Zero Trust EQMC Fund Equitilink elink ESL Investments ESL Investments Inc ESL Partners II ESL Partners Ethos Fund Eton Park Eton Park Capital Management Eurocastle Investment Everest Capital Advisors Exel Farallon Farallon Associates Farallon Capital Institutional Partners II Farallon Capital Institutional Partners III Farallon Capital Institutional Partners Farallon Capital Management Farallon Capital Management Farallon Capital Management Partners Farallon Capital Offshore Investors II Farallon Capital Offshore Investors Inc Ferox Capital Fortress Fortress Deutschland GmbH Fortress Investment Group FrontPoint Fulcrum Asset Management Gabelli Asset Management GAGFAH Immobilien-Management Gartmore GBH Acquisition GmbH Gerresheimer Group Glenview Capital GLG Partners Goldman Sachs Asset Management Goodwood Graham Investment Managers Grainger Trust Greenlight Capital Guy Wyser-Pratte Hao 63 Harold Simmons


Hastings Funds Management Heat Beteiligungs III GmbH Hennessee Group Hermitage Capital Corp Hermitage Capital Management HERMITAGE CAPITAL MANAGEMENT HIE Ventures Highbridge Highbridge Capital Highbridge Capital Management Highbridge Event Driven/ Relative Value Highbridge International Highfields Capital Highfields Capital GP Highfields Capital Management Highland Capital Corp Highland Capital Holding Corp Highland Capital Management Highland Capital Partners HL Income & Growth Trust Icahn Partners Icahn Partners Master Fund International Management Associates Investor Group Investor Group Investors Investors IXIS Capital Partners Jabre Capital Partners Jana Partners JP Morgan JTR Management JWM Partners K Capital Partners K Capital Pty Kailix Advisors KBC Alternative Investment Management Kingdon Capital Kynikos Lansdowne Partners Laxey Investment Trust Laxey Partners Legg Mason Liberation Investment Group Liverpool Liverpool Partnership London Diversified Fund Management Lone Pine Lone Pine Capital Longhirst Group Magnetar

Man Group Marcap Corp Marshall Wace Maverick Capital Millennium Partners Moneywise Queensland Pty Montrica Investment Management Moore Capital Murray Emerging Growth & Income Trust Murray Japan Growth & Income Murray Johnstone Holdings Murray Johnstone Murray Johnstone Private Equity Nakornthon Schroder Asset Management Co Northern Trust Corp Northern Venture Managers Oaktree Capital Group, Oaktree Capital Management Oaktree Capital Management. Och Ziff Capital Och-Ziff Och-Ziff Capital Management Group Och-Ziff Management Europe Octavian Advisors Omega Advisors Omega Advisors Inc Opportunity Partners Orbis AG Orbis Capital Orbis Investment Management Orbis Investment Management OSK Asia Securities Ospraie Management Owl Creek Asset Management Pardus Capital Mgmt Paulson & Co Pembridge Capital Management Pequot Capital Perry Capital Perry Capital Corp Perry Capital Group Perry Corp Pershing Square Capital Mgmt Pirate Capital Platinum Equity Polygon Investments Primemodern Prolific Financial Management PSAM Questor Partners Fund II RAB Capital


Red Kite Terra Firma Investments Relational Investors Thames River Capital Renaissance Technologies The Children’s Investment Fund Richard Blum Themis Investment Management Richards Longstaff Third Avenue Managment Rowe Price Fleming International Inc Third Point SAC Capital Third Point Partners SAC Capital Advisors Tibbet & Britten Deutschland Sandell Asset Management Tontine Sandell Asset Management Corp Tosca Fund Sandell Perkins Toscafund Santa Monica Partners Touradji Capital Scandinavian Property Development ASA Touradji Capital Management Schultze Asset Mgmt TPG-Axon Scottish National Trust Tracinda Corp Shepherd Investments International Trafelet & Co Silver Point Capital Trian Fund Management Silver Point Capital Fund Investments Trian Group SkyBridge Capital Tribeca Sloane Robinson Tudor Soros Fund Management Tudor Arbitrage Partners Southeastern Asset Management Tudor Capital Partners Stark International Tudor Capital Ventures II Stark Trading Tudor Capital Steel Partners Tudor Group Holdings Steel Partners II Tudor Investment Corp Steel Partners Turdor Investment Corp Stewart Horejsi Undisclosed Danish Properties SULO GmbH ValueAct Capital Management SULO Group Vega Asset Management SULO Nord-West GmbH & Co KG Viterra Energy Services AG Sulo Ost GmbH & Co KG Viterra Sicherheit und Service GmbH TCA Group VMS Value Management Services TDC A/S Whitehall Street Fund Techem AG WS Capital Techem AG Energy Contracting Wyser-Pratte Techem Energy Services GmbH York Capital Terra Firma Capital Partners Terra Firma Capital Partners Terra Firma Capital Partners -Movie Houses


List of hedge fund managers and hedge fund investors which were used to supplement the database search: William Ackman Jeffrey Altman Richard Blum Robert Burton Robert Chapman Steve Cohen Michael Dell Ric Dillon Phillip Goldstein Charles Gradante Christopher Hohn Stewart Horejsi Tom Hudson Carl Icahn Kirk Kerkorian Edward Lampert Daniel Loeb Donald T. Netter Jim Mitarotonda Nelson Peltz Barry Rosenstein Michael Roth David Shaw Harold Simmons Scott Sipprelle Carlos Slim Helu Brian Stark David Tepper Ralph Whitworth Guy Wyser-Pratte


Convertible Arbitrage: This strategy is identified by hedge investing in the convertible securities of a company. A typical investment is to be long the convertible bond and short the common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of stock, while protecting principal from market moves. Dedicated Shortseller: Dedicated short sellers were once a robust category of hedge funds before the long bull market rendered the strategy difficult to implement. A new category, short biased, has emerged. The strategy is to maintain net short as opposed to pure short exposure. Short biased managers take short positions in mostly equities and derivatives. The short bias of a manager's portfolio must be constantly greater than zero to be classified in this category. Emerging Markets: This strategy involves equity or fixed income investing in emerging markets around the world. Because many emerging markets do not allow short selling, nor offer viable futures or other derivative products with which to hedge, emerging market investing often employs a long-only strategy. Equity Market Neutral: This investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral, or both. Well-designed portfolios typically control for industry, sector, market capitalization, and other exposures. Leverage is often applied to enhance returns. Event Driven: This strategy is defined as `special situations' investing designed to capture price movement generated by a significant pending corporate event such as a merger, corporate restructuring, liquidation, bankruptcy or reorganization. There are three popular sub-categories in event-driven strategies: risk (merger) arbitrage, distressed/high yield securities, and Regulation D. Fixed Income Arbitrage: The fixed income arbitrageur aims to profit from price anomalies between related interest rate securities. Most managers trade globally with a goal of generating steady returns with low volatility. This category includes interest rate swap arbitrage, U.S. and non-U.S. government bond arbitrage, forward yield curve arbitrage, and mortgagebacked securities arbitrage. The mortgage-backed market is primarily U.S.based, over-the-counter and particularly complex. Global Macro: Global macro managers carry long and short positions in any of the world's major capital or derivative markets. These positions reflect their views on overall market direction as influenced by major economic trends and/or events. The portfolios of these funds can include stocks, bonds, currencies, and commodities in the form of cash or


derivatives instruments. Most funds invest globally in both developed and emerging markets. Long/Short Equity: This directional strategy involves equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral. Managers have the ability to shift from value to growth, from small to medium to large capitalization stocks, and from a net long position to a net short position. Managers may use futures and options to hedge. The focus may be regional, such as long/short U.S. or European equity, or sector specific, such as long and short technology or healthcare stocks. Long/short equity funds tend to build and hold portfolios that are substantially more concentrated than those of traditional stock funds. Managed Futures: This strategy invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors, or CTAs. Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, while discretionary managers use a judgmental approach. Multi-Strategy: The funds in this category are characterized by their ability to dynamically allocate capital among strategies falling within several traditional hedge fund disciplines. The use of many strategies, and the ability to reallocate capital between them in response to market opportunities, means that such funds are not easily assigned to any traditional category. The Multi-Strategy category also includes funds employing unique strategies that do not fall under any of the other descriptions. Fund of Funds: A `Multi Manager' fund will employ the services of two or more trading advisors or Hedge Funds who will be allocated cash by the Trading Manager to trade on behalf of the fund.


Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.