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Abstract: In the last decade, the hedge fund market has undergone a significant transformation: Along with exponential growth, hedge funds have become more institutionalized, diversified their clientele, and adopted a wider array of investment strategies. U.S. Securities and Exchange Commission (SEC) Chairman Christopher Cox has estimated that, in the global financial marketplace, hedge fund assets have increased about 3,000 percent since 1990. According to an industry survey, as of September 2007, some $1.8 trillion in assets is managed by about 10,000 hedge funds worldwide (an increase of about 20 percent since the beginning of that year). Although hedge funds account for 5 percent of all U.S. assets under management, they reportedly represent 30 percent of total U.S. equity trading volume. Today, the capital behind hedge funds no longer represents only the wealthy individuals who had underpinned the industry. In fact, much of the recent growth is attributable to investment by institutions. While seeking to diversify their risks and increase performance, long-term institutional investors (including private and public pension funds, endowments, and foundations) are now interested in absolute-return strategies and increasingly view hedge funds as an integral part of their asset allocation decisions. With hedge funds increasingly taking activist stances toward corporate management, companies are often caught unprepared and unable to rely on traditional investor relations expertise. Moreover, hedge funds are not a monolithic phenomenon and, unlike other investors, they are not required to disclose their investment strategies. Are hedge funds allies in the pursuit of shareholder value or are they speculators who seek to gain a short-term edge at the expense of the corporation and other owners? What should companies do to distinguish the types of hedge funds and understand their ultimate investment goals? The linkage of ownership rights and economic interests has long been a bedrock assumption of U.S. corporate governance. Indeed, “one share, one vote” has been the rallying cry for a generation of shareowners. But some hedge funds have used modern financial engineering techniques to sever this link, even while pursuing an activist agenda and challenging corporate managers. Is this a new threat to corporate governance, and, if so, what can be done about it? The Conference Board Research Working Group on Hedge Fund Activism was instituted in May 2007 and is composed of representatives from industry associations, major pension funds and asset management firms, as well as pubic corporations at the forefront of corporate governance developments. Delegates to the Working Group have developed the set of recommendations to corporate directors, executives, and investment professionals included in this report to help them address changes in the investment climate generated by the increasing presence of activist hedge funds. Due to the non-advocacy policy adopted by The Conference Board, the Working Group did not issue any recommendations to legislative bodies or regulatory agencies. |
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