A study in the Yale Law Journal has found that activist investors often fail to understand their targets and don’t do well in their investing as a result, reports an article in Chief Investment Officer. Activist investors tend not to take in the entire picture of the target companies, focusing more on short term and therefore making significant mistakes.
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From the beginning of 2013 through 2022, the Bloomberg Activist Hedge Fund index returned 132% while the S&P 500 returned 145%, and though exact data on how activist investors did during that period was unavailable, a 2020 study from Harvard Law School showed that activist investors had a 34% success rate in 2017. But the Yale study does provide many examples of activist investors missing their targets, such as Bill Ackman’s effort to revitalize J.C. Penney, which ended in his firm Pershing Square selling off the department store chain at a loss in 2013. Other examples of failure included Carl Icahn’s pressure on Netflix to sell itself, which it refused to do and has since rebounded.
There are, however, many examples of successful activist investing which are not cited in the Yale study, the article maintains. The hedge fund Engine No. 1 successfully battled to get three environmentally-focused members on the board at energy giant ExxonMobil, which has stated its commitment to reducing greenhouse gas emissions.