Every so often, in our hedge fund training course’s real-time updates and here in the blog, we like to feature a Ripped From The Headlines story about Activist investors.
When most people think of a hedge fund, they imagine traders shouting “Buy” and “Sell” into phones, or hunched over computer screens looking for patterns, or perhaps coding the latest quant algorithm. Think Bobby Axelrod and the headquarters of Axe Capital from Billions! But hedge fund strategies also encompass a very different kind of portfolio manager – the Activist.
Far from the frenetic, computer-driven trading of High-Frequency Traders (HFT) and the risky short-tradings of Equity Long/Short funds (see our blog from February 2nd on the GameStop Short Squeeze), long activist funds tend to hold only a handful of positions, and those for a long time – a trait they share with Private Equity funds.
Rather than profit from changes in securities prices driven by the market or by a company’s management, Activists attempt to influence the management itself, in order to drive the stock price up. Their main strategy is to purchase large numbers of a public company's shares so that they can obtain seats on the company's board. From that position of power, they then try to effect a major change in the company to realize the value and drive up the stock price. Why might an Activist do this? A company can become a target if it is mismanaged, has excessive costs or could be run more profitably as a private company. The Activist investor will try to change the management practices, strategy, cost structure or ownership structure in order to create more value.
Interestingly, there is also a reverse form of Activist investors – those who intervene to ensure that the price of a stock drops. This is most common if a portfolio manager believes they have identified some element of a company that, if known, would cause the company share to plummet – in many cases, this would be a company that was committing fraud. One famous short activist investor is Carson Block of Muddy Waters (https://en.wikipedia.org/wiki/Carson_Block). He is famous for exposing fraudulent US stock listings of Chinese companies. If you are interested to learn more, watch the documentary The China Hustle. Another famous case is Bill Ackman of Pershing Square (https://en.wikipedia.org/wiki/Bill_Ackman) – he claimed that Herbalife is a Pyramid scheme and bet $ 1 billion against it – for more, watches the documentary Betting on Zero. This is a particularly interesting case as there was a long hedge fund manager on the other end of the tussle – Carl Icahn.
There is much discussion about whether this kind of activist short-selling is ethical. On the one hand, the activist short sellers would say that they are doing the market a favour by exposing frauds and other problematic issuers, that they alert regulators to issues, and that they help with transparency. On the other hand, they are often accused of trashing good brands through false rumours. A recent fascinating case is that of Wirecard, a German payments processor and darling of the DAX – when the UK’s Financial Times started to write articles saying that they thought Wirecard was based on fraud, the company and the German authorities accused the FT journalists of being in bed with short sellers. As we all know now, they had in fact correctly identified a major US$2 billion fraud. You can read about it here.
Our Ripped From the Headlines example today is about a group of activist investors trying to stop the influence of Martin Shkreli (“Pharma Bro”) from his prison cell. Ironically, Shkreli himself was once a hedge fund manager. He was sentenced to seven years in prison in 2017, after being found guilty of two counts of securities fraud and one count of conspiring to commit securities fraud, and is famous for the controversy when his company Turing Pharmaceuticals obtained the license for the drug Daraprim and increased its price from US$13.50 to $750 per pill.
The aim of the activists is to purge associates of Shkreli from the Board of Turing Pharmaceutical’s parent company, Phoenix. If successful, it seems that future goals may be to unwind the increase in the price of Daraprimand to release more of the company’s cash, which recently amounted to roughly $56 million.
Interested in learning more about hedge fund strategies? Activist strategies are highlighted in our short course hedge fund training program “How Does a Hedge Fund Really Work?” and are also covered in the Business School-certified Henley Executive Hedge Fund Program. Relevant modules in the hedge fund certification program include Portfolio Management, Markets & Trading, and Ethics. In addition to these, the hedge fund course’s core curriculum also covers Operations & Technology, Business Management & Administration, Structuring and Set-up, Compliance and Operational Risk Management & Operational Due Diligence, amongst others.
A complimentary service in our hedge fund education offerings is the IPI Career Network. This annual subscription network (the “IPICN”) includes access to recordings of our Speaker Series webinars, and to future online events. There are also discounts on all our hedge fund courses, including “How Does a Hedge Fund Really Work?” and the Henley Executive Hedge Fund Program. Membership of the IPICN gives access to our online mentoring platform and our jobs board, featuring openings at hedge fund industry employers who recognise the value of our hedge funds training. And as normal life returns to the global financial centres, we will be resuming our popular “Networking Cocktails” events, with free invitations to IPICN members.
If you are looking for hedge fund education in bite-sized pieces, then you can also find the hedge fund certification program presented as individual hedge fund courses on our website. These modules are also available for corporate training departments in customized cohorts – we can put together any number of the relevant modules in a tailored configuration, focusing on the specific needs of company staff. Employees can take the course at the same time in a restricted cohort. The company can also add a member of management as a programms faculty member. See your options on our Hedge Fund Professional Certification.
For more information, contact Lisa So at lisa.so@ipi-edu.com.