Hedge funds do not have to disclose to the SEC any intentions to exert control of a company if they own less than 5% of a company.
These small stakes can still have huge impact, as we have seen at corporate giants like Exxon and Nestle. Even small hedge funds can have significant influence if they get others to join their pack, as Bluebell Capital had with Danone. These so called ‘wolf packs’ of multiple funds coordinate their activism to exert enormous influence on the governance of the firm.
A study by Mark DesJardine, an assistant professor of strategy and sustainability at Pennsylvania State University, with colleagues showed that hedge funds are likely to target corporations that are socially responsible, especially when the company stands above its peers – as was the case with Danone and Unilever. These hedge-funds managers see an opportunity to score quick financial wins. They strip companies of seemingly unnecessary expenditures, such as Danone’s investments in low-carbon technologies and regenerative agriculture, to increase the firm’s value.
But, here’s the rub. Another study by Mark DesJardine and Rodolphe Durand showed that, on average, activist hedge funds are able to extract short-term value, but they erode long-term value. The share prices of the companies hedge funds attacked increased by 7.66% in the first year, but they had fallen by 4.92% in the fourth year and 9.71% in the fifth. These hedge funds garner short-term wins by cutting the workforce, reducing operating expenses, and investing less on R&D, capital, and CSR. The company improves short-term cash flows, but reduce the company’s ability to innovate and erodes its ties to the community. By the third year, the targeted companies are in a cash crisis. It is a terrible fate for the company and for society as the company’s CSR efforts are stripped. [Emphasis added]Do Hedge Funds Create Value? 3 Lessons From Danone And Unilever