Transcripts

"Commentary"-The Power of Hedge Funds

SUSIE GHARIB: Tonight's commentator looks at the power of hedge funds, especially when it comes to forcing change through shareholder activism. Here's Mukul Pandya, executive director and editor of chief of "Knowledge at Wharton."

MUKUL PANDYA, EDITOR-IN-CHIEF, KNOWLEDGE@WHARTON: With more than $1 trillion under management, hedge funds undoubtedly have the ability to move markets. The question is, how does that happen? In one of the first academic studies to examine this issue, researchers at four business schools found that when hedge funds publicly announced that they would push for change at a targeted company, the result was a 5 to 7 percent jump in that company's stock price. These gains represented an abnormal return on top of the broad markets.

Wei Jiang, a visiting professor of finance at Wharton, conducted the study with colleagues from Duke University, the University of San Diego and Vanderbilt University. Jiang told knowledge@wharton that the share price boost came during the 40-day period surrounding a hedge funds announcement of a push for change. The study looked at 888 cases of shareholder activism by 131 hedge funds between 2001 and 2005. It found that, instead of seeking troubled companies, the funds sought out healthy firms with undervalued stock, as value investors do. The study also found that the average abnormal returns from that activism dropped from 10.6 percent in 2001 to 4.8 percent in 2005. In other words, as more funds chase attractive targets, abnormal returns might diminish or even disappear. It's good to know that the laws of economics are alive and well in hedge fund land. I'm Mukul Pandya.