Activist hedge funds beating the market

Data from Hedge Fund Research shows that hedge funds of activist shareholders have gained 6.8 percent in the current year for their investors. Excluding dividends, this is three times the market performance represented by the Standard & Poor’s 500 index that gained only 2.2 percent. With dividends, the S&P 500 is up 3.4 percent. 

This shows a changing trend in fund returns. Last year, the market performed much better than activist hedge funds. While the S&P increased by 12 percent, activist hedge funds have made about five percent, a performance already beaten by this year’s.

Reasons for the increasing returns of activist hedge funds are, on the one hand, psychological effects. If investors believe that activist hedge funds know what they are doing, investors seem to buy stock that activist hedge funds are also buying. This increases those share’s performance and hurts other companies in comparison. Activist buying first and other investors coming second increases the performance of the activist and hurts everybody buying afterwards.

A higher deal flow on the merger and acquisitions market may also trigger higher activist hedge fund returns. Since activists are also involved in M&A transactions, performance might have increased as well.