Hedge fund activism: the impact of institutional environments.

Hedge fund activism:

the impact of

institutional environments.

Master's Thesis International Business and Management

University of Groningen

Student: Abraham de Jong

Supervisor: Dr. Mrs. A. B. Kibriscikli Co-supervisor: Drs. Mr. H. C. Stek

Abstract

Contents

3.1.2. Rise and fall of the hedge fund industry, 1966-1974 ... 11

3.1.3. Rise again and acceleration, 1986-2007 ... 12

3.2.HEDGE FUNDS – WHAT THEY ARE, WHERE THEY ARE, AND WHAT THEY DO... 13

3.2.1. Definition and characteristics ... 13

3.2.2. Differences with private equity ... 15

3.2.3. Geographical distribution ... 17

3.2.4. Legal status and business forms used ... 17

3.2.5. Types and strategies ... 18

3.3.HEDGE FUND ACTIVISM... 19

3.3.1. Recent attention ... 19

3.3.2. Definition of hedge fund activism ... 19

3.3.3. Goals of hedge fund activism and ways to achieve the goals ... 20

3.3.4. Target companies ... 21

3.3.5. Hedge fund activism performance ... 21

3.4.INSTITUTIONAL ENVIRONMENTS... 22

3.4.1. Origin and basic features ... 23

3.4.2. Investor rights... 24 3.4.3. Financial systems ... 24 3.4.4. Corporate governance ... 24 4. RESEARCH METHODOLOGY... 25 4.1.DATA... 25 4.1.1. Availability ... 25 4.1.2. Sample definition ... 25 4.1.3. Scope... 26 4.1.4. Time frame... 26 4.1.5. Gathering cases ... 27 4.1.6. Description of variables ... 28 4.2.DATA PROCESSING... 29

4.2.1. Methodology for hedge fund activism development analyses ... 30

4.2.2. Methodology for hedge fund activism goals analyses ... 30

4.2.3. Methodology for hedge fund activism methods analyses... 30

4.2.4. Methodology for hedge fund activism results analyses ... 31

5. RESULTS AND ANALYSES... 32

5.1.1. Development of size ... 32

5.1.2. Geographical distribution ... 32

5.1.3. Hedge funds involved in activism ... 34

5.1.4. Hedge fund team-up... 34

5.1.5. Stake in target company... 34

5.2.GOALS OF HEDGE FUND ACTIVISM... 37

5.2.1. Goals of hedge fund activism in general ... 37

5.2.2. Goals of hedge fund activism by country... 37

5.2.3. Differences of goals between law systems: sales and mergers of companies or units ... 38

5.2.4. Differences of goals between law systems: stock price and dividends ... 39

5.2.5. Differences of goals between law systems: board composition ... 40

5.3.METHODS TO ACHIEVE HEDGE FUND ACTIVISM GOALS... 42

5.3.1. Methods of hedge fund activism in general ... 42

5.3.2. Methods of hedge fund activism by country and by law system... 43

5.3.3. Differences of methods between law systems: public pressure... 43

5.3.4. Differences of methods between law systems: shareholder meetings ... 44

5.3.5. Differences of methods between law systems: proxy fights ... 44

5.3.6. Differences of methods between law systems: lawsuits ... 45

5.4.RESULTS OF HEDGE FUND ACTIVISM... 46

5.4.1. Results of hedge fund activism in general... 46

5.4.2. Results by goal... 46

5.4.3. Results by method ... 47

5.4.4. Results by stake... 47

5.4.5. Results by country and by law system... 49

5.4.6. Causes of failures ... 50

6. CONCLUSIONS ... 51

7. LIMITATIONS AND FUTURE RESEARCH ... 53

REFERENCES... 54 BOOKS... 54 ARTICLES... 54 REPORTS... 58 MISCELLANEOUS... 58 WEBSITES... 58 APPENDIX A. GLOSSARY ... 60

APPENDIX B. HEDGE FUNDS AND OTHER PARTIES INVOLVED IN ACTIVISM... 61

Preface

When I'm writing this preface, at the close of this Master's Thesis about hedge fund activism, the developments regarding hedge funds are still proceeding. New hedge fund activism cases, interesting to investigate, arise. But one moment this thesis has to be finished. That is this moment. Besides the defence of this thesis this moment is also the end of my study International Business and Management. With pleasure I would like to make use of this moment to say something about this milestone.

In the five years I studied at the University of Groningen I learned much in the field of international business and management during courses like organizational behaviour, book-keeping, international strategic management, business economics, international financial management and a lot of other courses. Finally, about March-April from this year, I started with my Master's Thesis. Initially, I started with another topic, namely cross-listings of public companies, because of my growing interest in stock exchanges and control in organizations. But much was already written about cross-listings, including good overviews and patterns of cross-listings, which I otherwise intended to do. During that time, and actually already before that time, activism of hedge funds at Dutch companies Stork and at ABN Amro Bank attracted my attention. So I went on working out the very topical subject hedge fund activism. Hedge fund activism has also much to do with listed companies and control in organizations. A lot of business-related aspects learned in my study could be used and applied to this thesis; strategic, aspects, financial aspects, international(ization) aspects, etc.

This commits me to say a word of thanks to a number of people. That applies in general to the teachers of the university I got lectures or supervision from. They laid the basis for this thesis. In particular I will say a word of thanks to my supervisor Dr. Mrs. A. B. Kibriscikli. She spent several hours, excluding the hours she spent on reading, to discuss with me all kinds of difficulties arising during writing the thesis, and she supported me to find the right direction and relevance for the mass of information I had. I will also thank Drs. Mr. H. C. Stek for his work as co-supervisor.

1. Introduction

Last decades, and particularly last few years, hedge funds increasingly come into the news. The term hedge fund has no precise, unambiguously definition. Further on I will go more thoroughly into the definition and the characteristics of hedge funds, but in general it is used for an entity that holds a pool of securities and perhaps other assets, whose interests are not sold in a registered public offering, and which is not registered as an investment company under the Investment Company Act (SEC, 2003). So hedge funds are a kind of investment funds.

When hedge funds come into the news, they mostly appear in a bad daylight. This negative attention concerns almost entirely activism of hedge fund. This hedge fund activism goes further than only investing in companies. Hedge fund activism is in this thesis defined as 'any significant and often controversial attempt to influence the strategy of a company, initiated and led by a hedge fund being a shareholder of the company'. These attempts can have very different goals, like trying to get (units of) companies sold to another company, blocking a sale of a company to get a higher price for the company, trying to get own nominates on the board of directors to get control in the company, or pursuing an increase of dividends.

These and other similar actions of hedge funds are the concerns of many people, not in the least of politicians. Politics of much European countries are increasingly concerned with hedge funds. For example the Dutch Minister for Economic Affairs Joop Wijn called hedge funds at the end of 2006 locusts which eat bare companies and then leave. Before this years' French presidential elections, Nicolas Sarkozy said that when he should win the elections (and he did), he should push for a European tax on "speculative movements" by financial groups, such as hedge funds. As reason for this tax he mentions to "raise moral standards and improve security in financial capitalism". Sarkozy says that he cannot tolerate a hedge fund buying a company with debts, firing 25% of staff and then reimbursing them by selling it in pieces (Arnold, 2007). German officials use the German presidency of the EU and the G8 (June 2007 top in Heiligendamm) to push for regulation regarding hedge funds (Buergin & Kennedy, 2007). According to the German Finance Minister Peer Steinbrück, after a meeting of finance ministers and central bankers from the 27-country European Union in Berlin on April 21, 2007, a code of conduct for hedge funds should help to stabilize financial markets and to protect investors (Buergin & Kennedy, 2007).

But why do the politicians have so much fears and concerns about hedge funds? According to Carpenter the reason for the level of negative publicity surrounding hedge funds is that limited understanding breeds uncertainty (2002). De Boer (2007) mentions as one of the reasons that hedge funds last years increasingly came into the limelight the fact that they obtained again and again larger loans, by which they could attack larger and larger listed companies.

Now the question rises if all this turmoil is justifiable. Again I cite Carpenter (2002) when he says that the negative publicity surrounding hedge funds is caused by limited understanding. I think that this limited understanding together with the limited research still done about hedge fund activism contributes to the negativism. Efforts are already being made in connection with hedge fund activism research. For example the Dutch minister of Finance Wouter Bos announced he would have to investigate the extent of hedge fund activity in the Netherlands, partly because of three hedge fund activism cases, Stork, PCM and ABN Amro (Reformatorisch Dagblad, 2007). In this thesis I want to contribute to that knowledge, by investigating hedge fund activism, and by comparing it between countries.

Although much research is done on hedge funds, very little real research is still done on hedge fund activism. The few studies I found investigated hedge fund activism only in the United States, and not longer than up to and including 2006. Therefore I will extend the field by taking a worldwide perspective, and extend the timeframe to 2007, approximately April. Because yet so little is known, the first goal of this study is to give an overall picture of the development of hedge fund activism, including the size of activism, the stake of funds in the companies, and the goals, methods and results of hedge fund activism. This part of the study will be rather explorative.

After that, remarkable differences in goals, methods and results of hedge fund activism between countries will be explained by differences in institutional environments. The basic distinction I will make is between two law systems, the common-law system and the civil-law system. Together with these law systems the financial systems and corporate governance of countries will be discussed. These systems together I call the institutional environment.

The research question is:

How is hedge fund activism developing and how can differences between countries regarding goals, methods, and results of hedge fund activism be explained in the context of institutional environments?

The relevance of the results of this study is three-fold. In the first place the comparison between institutional environments. The results of this comparison are interesting for hedge funds (and other shareholders1_{). According to La Porta, Lopez-de-Silanes, Shleifer, & Vishny,} shareholder rights are determined by laws; they are not inherent in securities themselves. The protection of investors determines if they are prepared to invest in firms (1998). This study will reveal that common-law countries shape better and other shareholder environments than do civil-law countries, and that has its impacts on the goals, methods, and results of hedge fund activism.

For companies this is also important, because they can take into account which goals and methods hedge funds probably will 'present' when they attack, so companies can prevent hedge fund activism by anticipate on these goals, or prepare appropriate reactions.

Finally, the results of this study are relevant for politics. Although hedge fund activism is growing very fast, I found yet only 69 more or less 'aggressive' cases of hedge fund activism worldwide since 2003. Although there may be others (and therefore I call these 69 cases sometimes a sample) I believe most of the 'aggressive' cases are covered. From these 69 cases about 28 percent failed. So it might be better for politics to be rather prudent with drawing up rules and laws against hedge funds, and to be aware of the fact that hedge funds are also 'normal' shareholders. Restricting hedge funds can mean restricting other shareholders, which can damage the investment climate of a country.

1 _{Although this research is focussed on hedge funds, some issues are applicable as well to other shareholders; so}

2. Thesis methodology

In chapter 4 the specific methodology of the analyses will be elaborated on. Now I will explain the overall methodology of the thesis, together with its scientific relevance.

Looking at the research question, it appears that it consists of two parts. The first part is 'How is hedge fund activism developing?' and the second part is 'How can differences between countries regarding goals, methods, and results of hedge fund activism be explained in the context of institutional environments?

2.1. Survey design

2.1.1. Exploratory design

The first part of the research question is an exploratory as well as a descriptive survey. An exploratory survey can be used when the area of investigation is so new or vague that a researcher needs to do an exploration just to learn something about the problem (Cooper & Schindler, 2003). The field of hedge fund activism is such a new research area. I only have three articles from last few years that investigate hedge fund activism, but none that has a cross-country approach (or even outside the United States) and none that links hedge fund activism to institutional environments. So the first part of the research question is partial exploratory of its nature, and it relies indeed primarily on qualitative data.

Although Cooper & Schindler (2003) suggest to get the data from secondary data if possible (to save time), it appeared in my research not possible in general, because, as later will be pointed out, no database existed with the information I needed. So almost the whole dataset used in my research is hand-gathered.

2.1.2. Descriptive design

The first part of the research question is also partially descriptive, as is the whole second part of the research question. According to Gill & Johnson (1997) a descriptive survey means that the research is concerned in particular with certain characteristics of a population. Cooper & Schindler 2003 go more into detail and say that descriptive studies contain mostly questions like who, what, when, where, and how of a topic, estimates of proportions, and associations among different variables (2003). These are the questions I will (implicitly) ask, when investigating the size of hedge fund activism, the geographical distribution, etc.

2.2. Evaluation criteria

2.2.1. Internal validity

Gill & Johnson say that internal validity (whether or not the causes produce the outcomes) in descriptive surveys are relatively weak (1997). In this thesis this is also the case, because it might be difficult to say if possible differences in goals, methods and results of hedge fund activism between different institutional environments are the product of the specific institutional environment, or that other factors play a role. Yet, due to the large sample and because the law system, the financial system and the corporate governance are all included in the analyses, it will be made plausible that there is a strong link between the institutional environments and differences in hedge fund activism.

2.2.2. Population validity

All cases that satisfied the strict definition of hedge fund activism I use were 69, and they were all included in the analyses. So if the population is defined according to that definition, the sample is the same as the population, and like Gill & Johnson (1997) predict for descriptive surveys, population validity is high in my research, because it is possible to generalize the sample of 69 cases to the whole population. In that case I actually do not need to talk about a sample. But because it is possible that some cases are missed, and because I sometimes want to generalize beyond the strict definition, I will mostly talk about the sample of activism cases. But even in that case population validity is high, due to the large sample size and due to the generalizability and applicability of a lot of issues to other shareholders, as appears from the literature used.

2.2.3. Ecological validity

Ecological validity concerns if the research can be generalized (from a special artificial research setting for example) to other contexts, in particular the real-life context (Gill & Johnson, 1997). Because the data of hedge fund activism is already real-life data, and there is no artificial research setting, the ecological validity is very high, because the research setting equals the real-life context.

2.2.4. Reliability

3. Literature review

3.1. History

3.1.1. The beginning

The fund commonly considered to be the first hedge fund (Edwards, 1999) was established in the United States by Alfred Winslow Jones in 1949, as a general partnership. Jones was a remarkable individual (Gabelli, 2007), who served after graduating at Harvard as purser on a ship, as U.S. diplomat in Germany, and as a journalist. In that last capacity he got the idea that he had a better system for managing money (Gabelli, 2007).

According to Jones there were two sources of risk in stock investments; risk from individual stock selection and risk of a drop in the general market (Eichengreen & Mathieson, 1999). Jones went long on stocks he perceived to be undervalued. To hedge against a drop in the general market, Jones sold short other stocks, which he perceived to be overvalued. By using short and long positions, the fund was hedged to the extent the portfolio was split between stocks that would gain if the market went up, and short positions that would benefit if the market went down. That is the reason for the term 'hedge fund' (Eichengreen & Mathieson, 1999). This term promised 'profit without risk' (Lindgren, 2007). However, Edwards (1999) postulates that Jones' trading strategy is not what generally is meant by 'hedging', because it does not reduce the prospect of losses by taking on a counterbalancing transaction. Edwards calls Jones' strategy "a leveraged speculation on the performance of one type of security relative to another type of security, while attempting to immunize the portfolio from general market movements (or from systematic risk)" (1999: 190). This view is interesting, because it makes clear that the hedge fund of Jones, and also latter-days hedge funds, are normally not completely hedged2_{, and so they can bear (significant) risk.}

A typical characteristic of Jones' hedge fund was leverage, as just mentioned. Jones used leverage (borrowed money) to enhance the potential return on the fund's assets (Gabelli, 2007). As will be seen, leverage is still one of the main characteristics of hedge funds.

In 1952 Jones changed the structure of his fund into a limited partnership from a general partnership. He also introduced a profit incentive fee of 20% for himself as managing partner, while his fortune remained in the fund.

3.1.2. Rise and fall of the hedge fund industry, 1966-1974

In 1966 an article titled "The Jones' nobody keeps up with" appeared in Fortune. That article revealed Jones' unique investment strategy and that Jones' fund outperformed even the best performing mutual fund (Gabelli, 2007). This favourable publicity and the rise of the stock market (Eichengreen & Mathieson, 1999) caused a proliferation of hedge funds. A SEC study of hedge funds from 1969 estimates the number of hedge funds at that time at about 200

2 _{For a more detailed covering of hedging and hedging techniques see elaborated studies like Deshmukh & Vogt}

with estimated total assets of about $1.5 billion, which it called a "rapid increase in the number and assets of hedge funds" (1969:18).

However, this did not last very long. The reason according to Gabelli was that in the go-go markets3 _{of the mid-late 1960s numbers of hedge fund managers did not longer short a} portion of the portfolio because that would restrain performance. These funds were leveraged, particularly long-only, risky business in less accommodating markets. This produced some big hedge fund losses in 1969-70 and major bloodletting in the savage 1973-74 bear market (2007).

3.1.3. Rise again and acceleration, 1986-2007

According to Gabelli (2007) the hedge fund industry limped along until the early 1990's. McWhinney (2005) puts the real starting point of the renewed interest in hedge funds in 1986, when an article appeared in Institutional Investor that reported about the double-digit performance of Julian Robertson's Tiger Fund (on which I will come back soon). McWhinney sees the attention to this fund as main trigger for the growth in hedge funds. Eichengreen & Mathieson (1999) say that the global financial liberalization of the 1980s opened new investment opportunities involving a resurgence of the hedge fund industry. This is in line with a SEC report (2003) which also concludes that hedge funds over time began to diversify their investment portfolios to include other financial instruments and engaged in a wider variety of investment strategies. Probably, the publicity of hedge funds and the growth of the industry have had (and still have) a reciprocal relationship.

Estimates on the number of hedge funds differ. According to the estimates of the IFSL (2007) the number of hedge funds reached over 9000 in 2006 across from about 3000 in 1996. Only the years 2000-2001 show a short retard in the growth of the number of hedge funds. A reason for this retard may be the problems of some (in particular two) of the largest hedge funds in that period. One of these funds was Long-Term Capital Management, which lost more than $4.5 billion in just a few months and went bankrupt in early 2000. Although the fund ultimately paid back $1.3 billion to investors, many on Wall Street regarded the fund's near-collapse4 _{as a warning sign for high-flying hedge funds (Karchmer, 2000).}

The other hedge fund that may have contributed to the retard in the growth of the number of hedge funds during the years 2000-2001 was Tiger Management. The problems at Tiger Management began roughly in 1998-1999, when it lost nearly $2 billion on one day due to a wrong bet on the yen5_{. This loss and rumours about financial troubles caused Tiger} Management to suffer many withdrawals and the need to sell positions to raise cash for these withdrawals (Pacelle, 1999). But if these cases of hedge fund problems have contributed to declining interest and the retard in the growth of the number of hedge funds or not, after the slow down the number of hedge funds again rapidly increased. One of the reasons for the growth of the hedge fund industry in the last years, according to the SEC (2003), is the increased interest of institutional investors such as pension plans, which want to diversify their portfolios with investments in vehicles that feature absolute return strategies - e.g. hedge funds.

3 _{The 'go-go' years are the 1960s, named so by John Brooks who wrote a book about these years of continuously}

increasing stock prices and stock market growth.

4 _{Before LTCM eventually went bankrupt in early 2000, it was rescued by a number of banks and brokerage}

firms.

5 _{Tiger Management borrowed yen and invested it in dollars. When the yen suddenly strengthened, Tiger}

3.2. Hedge funds – what they are, where they are, and what they do

3.2.1. Definition and characteristics

In the previous paragraph I said that estimates on the number of hedge funds differ. One of the reasons for that is that there is no single definition of a hedge fund. There is also no precise legal definition (SEC, 2003). In English law also no statutory, regulatory or judicial definition exists (Atiyah, 2004). Other sources I read also had difficulties with a definition of hedge funds. Therefore I will now develop a description of hedge funds on the basis of the most common general characteristics. Thus hedge funds are investment entities which in general share the following characteristics:

a) Form of private equity

In the hedge fund study of the SEC of 1969, probably one of the first studies on hedge funds, hedge funds are described as being generally "private investment partnerships which employ speculative investment techniques with a view to rapid capital appreciation" (1969: 18). In the SEC report of 2003, nearly 35 years later, the term hedge fund generally is used for "an entity that holds a pool of securities and perhaps other assets, whose interests are not sold in a registered public offering and which is not registered as an investment company under the Investment Company Act" (SEC, 2003: 3).

The largest similarity6 _{between these two characterizations is that both call hedge} funds 'private' (1969) or 'whose interests are not sold in a registered public offering' (2003), which comes to the same thing, namely that hedge funds are normally a form of private equity, which means that they are not traded or listed on a public exchange. This can release them often from much disclosure and regulation7

(Eichengreen & Mathieson, 1999 and Bernstein, 2002). Another advantage of the 'private nature' of hedge funds is that it gives hedge funds 'tremendous' flexibility in the types of investments they can make and the strategies they can follow, which makes it possible for them to offset risks against each other and perform well under all kinds of market conditions (Bernstein, 2002).

b) Pursuance of positive absolute returns

Registered investment funds, like mutual funds, often try to beat some benchmark return, like the Standard & Poors 500 stock index8_{. So even if a fund declines in value, the} managers can attract more investors and are paid more money, as long as the fund performs better than the benchmark, as Ubide (2006) argues.

Hedge funds on the contrary seek to maximize absolute returns, so they seek to make money in a variety of market environments (SEC, 2003).

6

An interesting difference between these two characterizations is that the first one (1969) talks about hedge funds employing speculative investment techniques. Although this can be true, it is only part of the picture. The fact is that hedge funds also write or buy put and call options, as the SEC (1969) itself also says. These put and call options can be subject of speculating themselves, but they can also be used to hedge against risks of speculating. In the second characterization this is recognized, or at least the word speculation is omitted.

7 _{The requirements of disclosure by hedge funds in the US became more strict in 2004, see the 'Registration}

Under the Advisers Act of Certain Hedge Fund Advisers; Final Rule' (SEC, 2004).

8 _{A United States leading index of 500 companies, which should reflect the overall large-capitalization stock}

c) Use of various investment strategies

Hedge funds often use multiple strategies in order to provide flexibility to take advantage of changing market conditions (SEC, 2003). Examples of strategies are long positions (rising market), short positions (falling market), derivatives (like options, for limited losses). In paragraph 3.2.5 I will come back on different investment strategies.

d) Great degree of leverage use

'Leverage' is borrowing money, investing it and trying to get a higher return on it than the cost of borrowing (usually interest). Because by borrowing money, more money is available to invest (than in the case only equity capital is used), there is more potential for high returns – but also more potential for high losses.

Hedge funds in general make use of a high degree of leverage. According to the President's working group on financial markets (1999) hedge funds' use of leverage contrasts to that of other types of investments because hedge funds often use leverage aggressively. For example, LTCM had in 1998 the very high leverage factor9 _{of 25 (President's working group} on financial markets, 1999).

The sometimes enormous use of leverage is one of the points of contention when it concerns hedge funds. Weiss for example blames the 'excessive' use of leverage, not only by hedge funds but also by banks and securities firms (1998). Weiss would like to see some limits on leverage, for example trigger points for leverage disclosure (1998). However, according to Ferrell (2004), limits on leverage are not a good idea. Leverage namely can increase the size and diversification of the portfolio. Ferrell states that the key to leverage is employing it prudently to assets with stable, low volatility, to make the most of a portfolio managed to maximize the Sharpe ratio10

, which will eventually lead to increased long-term performance (2004).

e) Owners and investors are high net worth individuals

Hedge funds are often owned by high net worth individuals, who are therefore also the main investors. The restriction of share ownership to rich individuals can have the advantage the fund is free from most disclosure and regulation requirements that applies to mutual funds and banks (Eichengreen & Mathieson, 1999).

However, this characteristic is clearly fading. One of the reasons therefore is that recently the products of hedge funds have become increasingly available to retail investors due to the development of funds investing in hedge funds (funds of hedge funds) and structured financial instruments with hedge fund-linked performance (Garbaravicius & Dierick, 2005). Another, related reason for the fading of this characteristic is the increased investment from institutional investors, who are attracted by risk diversification, flexibility of investment options and the ability to deliver nonmarket correlated returns (IFSL, 2007). According to the investment advising company Hennessee Group, the global hedge fund capital provided by individuals was only 40% in 2006 in contrast to 61% in1997. The share of pension funds more the doubled in the same period, from 5% to 11% (IFSL, 2007).

9

The leverage ratio is obtained by dividing a company's assets by its equity. So the leverage factor of a company is the number of times the capital borrowed is larger than the company's equity capital.

10 _{The Sharpe ratio is calculated as (E[R-R}

f])/σ, where R = return on the asset, Rf = risk-free (market) return,

E[R-Rf] = expected return of the asset above the risk-free return, σ = standard deviation (risk) of the asset. The

f) Personal capital commitment of managers

Eichengreen & Mathieson view this characteristic as one of the two notable characteristics of Jones's fund that continues to this day (the other is the performance based management fees) (1999). The SEC (2004) states that the professional investment managers who organize hedge funds often have a significant stake in the funds they manage. This was already the fact with the hedge fund of Jones who started with $100,000 from which $40,000 was his own money (Gabelli, 2007). An advantage of managers holding their own money in a fund can be seen in the reasoning of Garbaravicius & Dierick. They say that in such a case the preservation of capital is very important and that the motivation to take excessive risks is curtailed to some extent in this way (2005)

g) Performance-based management fees

One of the criticisms on hedge funds regards the size and the indistinctness of management fees. Hedge funds do not have a standard fee structure (Tergesen, 2005), which makes it difficult to compare the fees different funds charge from investors, or even to determine the exact costs for investors.

Typical management fees are 1% to 2% of net assets plus 20% of the profits according to Tergesen (2005). The second part of the fees, the proportion of the profits, is also called the 'incentive fee'. But often these are only two components of the total fees charged from investors. With the extra expenses charged by hedge funds, covering administrative and professional services, trader bonuses, technology expenses and 'other expenses', the average investor pays as much as 3.5% of assets a year, according to advisor to hedge-fund investors LJH Global Investments (Tergesen, 2005). The Tass database concludes that the average fee over the last decade was even higher, 3.8% (Chen, 2006).

But the discussion about the size and the indistinctness of hedge fund fees detracts nothing from the fact that the fees are performance-based. Because the charges of hedge fund managers are performance-based11_{, the fund managers have a clear incentive to strive for good} (Nyberg, 2006).

3.2.2. Differences with private equity

Private equity funds and hedge funds are often reduced to a common denominator. This is not completely unjust, because according to Maier & Atzler (2006) and Tun & Cochrane (2006) the line between private equity firms and hedge funds is blurring. As an example for this convergence Maier & Atzler mention that hedge funds require longer holding periods from their investors, which is typical at private equity firms (2006). Tun & Cochrane (2006) add to this the increased involvement of hedge funds in recent years in 'high-profile corporate actions' (for example mergers and acquisitions).

Bevilacqua (2006) also ascertains that private equity and hedge funds are converging. In particular he points to the more private-equity-like investment styles adopted by hedge funds, accompanied with longer lock-up periods of hedge funds and often causing less liquidity.

11

Private equity (PE) Hedge funds (HF) Sources Lifetime Limited, usually 10-13 years (first

few years typically for raising and investing money, other years for managing and developing investment, and finally realizing returns (by means of IPO e.g.).

Unlimited. IFSL, 2007; Bevilacqua, 2006;

Judd, 2006

Type of investment

Illiquid (e.g. not actively traded in public markets)

Fairly liquid. IFSL, 2007; Thomas &

Young, 2006; Bevilacqua, 2006; Judd, 2006

Time investment is hold

Usually five to seven years, sometimes longer.

Usually no longer than 1.5 years. Thomas & Young, 2006 Investors liquidity Closed-end funds, usually closed

to new investors after six months to a year. Capital lock-up period usually for the life of the fund.

Open-ended funds, usually continue to admit new investors over the life of the fund. Periodic subscribings and withdrawals possible. Capital lock-up period typically no more than 2 years.

IFSL, 2007; Judd, 2006; Bevilacqua, 2006

Management Fees Based on capital commitment.

Based on net asset value. Calculated over short term results (marked-to-market).

IFSL, 2007; Thomas & Young, 2006; Judd, 2006; Bevilacqua, 2006

Performance-based fees

Paid only on realised investments, so calculated over long-term results.

Paid annually on realised and unrealised gains, so calculated over short term results (marked-to-market).

IFSL, 2007; Bevilacqua, 2006; Judd, 2006

Strategic direction Focus on developing strategy, active board of directors participation.

Focus on returns and hedging strategies of company and industry; like PE increasingly seeking board seats and seeking to influence management decisions.

Thomas & Young, 2006

Due diligence methodology

Usually long and detailed. Usually rapid. Thomas & Young, 2006 Risk tolerance Rather risk-averse. Not very risk-averse. Thomas & Young, 2006 Asset valuation

methodology

Long-term valuation methodologies.

Marked-to-market, used in exit strategies decisions.

Thomas & Young, 2006; Judd, 2006; Bevilacqua, 2006 Desired return on

investments

May be adjusted for market share, profitability, revenues, valuation metrics, etc.

Strive for higher levels than PE. Based on 'invested value – sales proceeds'.

Thomas & Young, 2006

Control May replace targets' senior management, controls the board of directors.

Management may often be left in position. Goal is a buy-and-sell position. In 'loan to own' investments hedge funds may mimic PE in replacing senior management, etc.

Thomas & Young, 2006

Assessment of standard financial metrics

EBITDA, leverage, liquidity, etc. might be calculated in the same way as HF. Differences in views of the size of the metrics.

EBITDA, leverage, liquidity, etc. might be calculated in the same way as PE.

Differences in views of the size of the metrics.

Thomas & Young, 2006

Industry focus Avoid volatility more than hedge funds.

Competitive industries, volatile

marketplaces, underperforming companies (which are often rather volatile).

Thomas & Young 2006; Bevilacqua, 2006 Taxation and

legal structure

Invests rather than trades, so profits are capital gains (relatively favourable taxed), goal is to be tax-transparent or tax-neutral.

Tax-inefficient because profits are trading income rather than capital gains, therefore often structured as open-ended investment companies in tax havens.

Judd, 2006;

Other signs of possible convergence between hedge funds and private equity are private equity funds launching hedge funds last years and hedge fund managers buying private equity funds (Judd, 2006).

But although there are indeed signs of convergence, there are still differences between private equity firms and hedge funds. Because my thesis deals specifically with hedge funds, I will make clear the main differences between these two kinds of investment companies.

According to Thomas & Young (2006) the main difference between hedge funds and private equity is that private equity funds seek to buy all of the equity of companies while hedge funds are not constrained to controlling equity investments. To make it well-organized, I compiled a list (table 1, previous page) with the most important differences, and the sources which were used for it. These sources are mainly articles which specifically focus on the differences between private equity and hedge funds.

3.2.3. Geographical distribution

IFSL (2007) shows that 55% of all hedge funds last years were registered offshore, with the Cayman Islands as most popular location, followed by the British Virgin Islands and Bermuda. From the onshore locations 48% was registered in the United States, followed by 7% in Ireland. The reason so many hedge funds are domiciled off-shore is the low level of regulation and external control, and the ease to set up a hedge fund, both characteristic for the already mentioned off-shore locations (Garbaravicius & Dierick, 2005).

From the report of PricewaterhouseCoopers (2006) on tax regimes and regulations regarding hedge funds clearly appears that taxes in the most-favoured hedge fund locations are very low, or even zero, like on the Cayman Islands and Bermuda. The average time to set up a hedge fund in 2006, according to PricewaterhouseCoopers, was 1 day on the Cayman Islands and up to 5 days on Bermuda. This can contribute to the popularity of these locations over other locations, like France, where setting up a hedge fund can take 3 to 6 months, or Italy, where it may take even 6 to 8 months.

3.2.4. Legal status and business forms used

The first hedge fund, from Jones, started as a general partnership (GP) and was changed into a limited partnership (LP) by 1952. Jones' choice to change the business form of his hedge fund would not have been without any reason. The choice of a particular business form for hedge funds is an important choice, which has its impact on liability, accessibility, taxes, etc. Today, hedge funds are commonly organized as limited partnerships or limited liability companies (LLC) (Bevilacqua, 2006).

The main characteristic of a general partnership is that the owners (the general partners) are personally responsible for the debt of the partnership. So if the GP fails, the partners have to pay off any outstanding debt with their private capital. The most important difference between a general partnership and a limited partnership is that a limited partnership has also limited partners, which have limited liability regarding the debts of the partnership. Atiyah also says that it is important for hedge fund investors that their investment is a limited liability investment, so that on any insolvency of the hedge fund (and they often have a relatively high risk of insolvency) the investors could not be pursued by the creditors.

The limited liability is, together with tax advantages, one of the reasons according to Auster (2005) that limited liability companies have become extremely popular. However, as Auster argues, LLCs do not only have advantages. Tax advantages are not unique to LLCs (they exist also in partnerships, as just pointed out). Furthermore, the LLC has no limited liability advantage, because in a LLC liability is only limited for debts, not for malpractice, in contrast to a corporation, which does have limited liability for shareholders and employees, even in case of malpractice (2005).

3.2.5. Types and strategies

Although I up till now talked about 'hedge funds' as being more or less an unambiguous to describe phenomenon, the term 'hedge funds' is a collective noun of many different types. Felix Goltz, research engineer at the French Business school Edhec, says that you cannot talk about hedge funds and group them together as one category, but you should talk about the different actual strategies they employ (Collins, 2006). Lumping hedge funds together is understandable given the lack of information hedge funds offer about themselves, but it may produce an inappropriate response from investors, lenders and regulators (Economist, 1998).

To distinguish between different hedge funds, they are most times classified by their strategies (investment styles). Different classifications are used. The CSFB/Tremont aggregate hedge fund index for example consists of nine subindexes for the primary hedge fund investment styles (Asness, Krail, & Liew, 2001). Fung & Hsieh (1997) use five style categories to describe hedge fund trading strategies. I will now deal with some of the styles.

Long only strategies, as the name implies, only have long equity positions, typically with leverage (Al-Sharkas, 2005). This group however is not very large. This is also the case with short sales strategies, which is precisely reversed to the long only strategy. The short sales strategy is the selling of borrowed stock, expecting that the stock price has fallen when the shares have to be paid back, and the shares can be bought at a discount in the market. Strategies that have both long and short positions are equity market neutral strategies and dedicated short bias strategies. By having both long and short positions these strategies promise to neutralize market risk to a great extent, and so their return patterns should more or less be independent from the ups and downs of the stock market (Lett, 2003).

Convertible arbitrage is when the investor buys for example a convertible bond of a company, which can be converted into a fixed amount of shares. Simultaneously, he sells short the same stock. If the share price does not fall when the shares have to be paid back, the bond can be converted into shares. In this way the convertible bond is a hedge for the shorted shares. So profits can be made by shorting and by fixed income from the bond (interest). A risk of this strategy is default of the issuing company. Another arbitrage strategy is fixed-income arbitrage, when investors use (small) discrepancies between prices of securities with a fixed stream of income (like bonds).

Managed futures strategies are managed by so-called Commodity Trading Advisors (CTAs), and they trade and invest long or short in futures of currencies and commodities, like metals and grains.

The global macro strategy focuses on large capital or derivative markets, and investments are among other things in stocks, bonds, foreign exchange and derivatives. Managers of global macro strategies typically bet on macroeconomic events such as changes in interest rate policies and currency devaluations (Fung & Hsieh, 1997).

possible), distressed strategies (positions in the debt of a company that is in financial difficulty), and event-driven strategies (seeking for special situations (events) of companies, like mergers and acquisitions (Collins, 2006)).

A strategy that falls a bit apart is the multi-strategy; it has capital employed in a variety of strategies, which can be a form of diversification within a hedge fund. However, interest in multi-strategy hedge funds is decreasing according to the 2006 Alternative Investment Survey of the Deutsche Bank (Avery, 2007). One of the reasons is the collapse of multi-strategy hedge fund Amaranth Advisors in 2006 (Avery, 2007).

Last strategy to be mentioned is the fund of hedge funds, (mostly called just fund of funds). It is a fund that invests in other hedge funds, rather than in stock, bonds, etc.

3.3. Hedge fund activism

3.3.1. Recent attention

In February 2007 the Children's Investment Fund (TCI), an London based hedge fund, started a campaign for breaking up the Dutch ABN Amro Banks operations, because the bank was significantly undervalued according to TCI. Not long for that, in the fall of 2006, another Dutch company was attacked, this time by hedge funds Centaurus Capital and Paulson & Co. The attack concerned Stork in that case. Centaurus and Paulson wanted to split up the concern, which then consisted of four divisions, Aerospace, Technical Services, Food Systems en Prints. Not long for that, in 2005, TCI, accompanied by some other investors including hedge fund Atticus Capital, succeeded to prevent Deutsch Borse from taking over the London Stock Exchange. Rolf-Ernst Breuer, chairman of the German company's supervisory board, and chief executive Werner Seifert had to resign, because of this 'astonishing coup' (Cohn, Reed, Ewing, & Ihlwan, 2005).

Cohn et al. state that TCI is 'at the forefront of a new breed of restless shareholders in Europe that are demanding that management create shareholder value, or else (2005). Matlack argues in this vein, in connection with the ABN Amro Bank campaign and other cases, that hedge funds become bolder in putting the squeeze on some of Europe's biggest blue chips, to streamline operations and shed underperforming assets (2007). Chris Young, head of mergers-and-acquisitions research for U.S-based Institutional Shareholder Services, also expects more of this kind of activity (Matlack, 2007).

Yet most of the hedge funds are not very activist oriented (Hooft van Huysduynen, 2007). So it should be expected that only a small group of hedge funds are activist hedge funds, and these group becomes bolder and bolder.

3.3.2. Definition of hedge fund activism

direct attempt to change the fundamental strategic direction of any solvent United States public corporation other than a mutual fund.

Klein, & Zur (2006) define hedge fund activism as 'a strategy in which a hedge fund purchases a 5 percent or greater stake in a publicly-traded firm with the stated intent of influencing the firm’s policies' (2006: 1). This 5% stake is also a criterion used by Brav, Jiang, Partnoy, & Thomas (2006) for composing their sample of hedge fund events, although they give no real definition of hedge fund activism.

The reason Klein & Zur (2006) and Brav et al. (2006) use the 5% criterion is for the benefit of creating a sample and gathering data. When a person or group in the United States acquires 5% or more of any class of a company's shares it must file a Schedule 13D with the SEC. This filing requires a lot of useful information, like the acquirer, size of the acquisition and the purpose of the transaction (SEC, 2007). Al these filings are available via the EDGAR database of the SEC, what eases the data gathering process. However, I will not use this criterion, because it can ignore important activism cases. For example, TCI had only a 1% stake in ABN Amro Bank when it started to put pressure on it. In this case TCI was not required to file Schedule 13D with the SEC, while it is a clear activism example12

.

Partly based on these definitions, I will for purposes of this study define hedge fund activism as 'any significant and often controversial attempt to influence the strategy of a company, initiated and led by a hedge fund being a shareholder of the company'. In the next chapter on research methodology I will elaborate on the cases included in this study.

3.3.3. Goals of hedge fund activism and ways to achieve the goals

As already seen, the goal of hedge funds is to make a positive return and, like most other shareholders, the ultimate goal is to maximize that return, or, in other words, to maximize shareholder value. That this also applies to activist hedge funds, states Perrie Weiner, a Partner and International Co-Chairman of Securities Litigation at DLA Piper, who says that shareholders of public companies in the US have interests that are almost perfectly aligned with those of activist hedge funds that have invested in the company (Harrison, 2007). But shareholder value maximization is only the overall goal of hedge funds. I will now deal with the more specific goals of hedge fund activism, and the means by which these goals are pursued.

According to Briggs, there are three principal reasons of the growing hedge fund activism. The first is the pressure to perform. Because enormous amounts of money are invested in hedge funds last years, and the returns in traditional strategies have stagnated, hedge funds turn to activism as a new way to perform and please their investors. Second reason is that investors after the Enron-debacle may have a greater willingness to hold underperforming managements to account. Thirdly, hedge fund proxy contests become easier and cheaper due to large deregulation13_{. The first reason is supported by Brav et al., who say} that due to the growth of the hedge fund industry over the last few years arbitrage opportunities decreased, and therefore many hedge funds have turned to hedge fund activism, an alternative strategy (2006).

The goals of this activism according to Brav et al. are most times general issues, like governance and payout. In their investigated sample of US hedge fund activism cases in

12

In the case of Abn Amro TCI was not required at all to file a Schedule 13D, even if it had more than 5% of Abn Amro, because it is a case outside the US. However, imagining a similar case in the US, it clearly illustrates the shortcoming of the Schedule 13D-criterion used by the researchers mentioned.

13 _{The article is based on the US situation, so the third reason of growing hedge fund activism based on Briggs}

2005 they found that the stated activism goals (in Schedule 13D) of hedge funds in most cases had to do with undervaluation, shareholder value maximization or inefficient management of the companies. Paying out more dividends and selling (parts of) the target company was also a 'popular' goal (2006). The selling of a company as main activism goal was also mentioned by Klein & Zur, who screened also Schedule 13D filings (2003-2005). Other goals mentioned by Klein & Zur are intended changes in the composition of boards of directors, the view that the target firm should pursue strategic alternatives, and the opposing/proposing of a merger (2006).

Klein & Zur present furthermore two ways to maximize shareholder value. The first is altering the firm's strategic policies through redirections of investments (e.g. selling of less-productive assets). The second way is to reduce agency costs by forcing the firm to reduce its excess cash holdings (e.g. by increasing dividends or raising debt loads) (2006).

To get companies pursue desired goals, activist hedge funds can aim to build up significant equity stakes to effect shareholder-led changes in corporate management or corporate governance (Judd, 2006). With a significant stake in an organization, or with sufficient support from other shareholders, hedge funds can successfully move proposals in shareholder meetings, for example to get a seat in the board, which they (according to Briggs, 2006) believe will help them achieve greater control over their investments and maybe increase profits.

These are the activities which (among other things) are called by politicians 'stripping and demolishing' companies

3.3.4. Target companies

One could expect that companies targeted by hedge funds are weak companies that have a high potential to be improved. However, the sample of Brav et al. (2006) consisted of companies which were in general not suffering serious operational difficulties, but of profitable firms with handsome cash flows (2006). Klein & Zur support the fact that hedge funds are more likely to invest in healthy, profitable firms (2006).

Companies with poor corporate governance practices are also potential targets (Pearson, & Altman, 2006). Reason for this can be that management gets extravagant high compensation, or pays too low dividends, which causes the hedge fund to target that management. Another characteristic of companies targeted by hedge funds is that they are often small companies according to Klein & Zur (2006), who compared their sample with the S&P 500 index. The fact that (very) large companies are less likely to be attacked by hedge funds may be caused by the large amount of capital necessary to amass a meaningful stake in such companies (Brav et al., 2006).

Although the type of companies targeted is interesting, a full analysis of my sample regarding types of target companies falls beyond the scope of my research. This paragraph however was added to the literature review for the sake of completeness because a number of cases will be elaborated on in more detail in chapter 5.

3.3.5. Hedge fund activism performance

Klein and Zur show that hedge fund activists are 'extremely effective' in making significant changes to their target firms. As evidence they show that the companies in their sample have 100% success rates in replacing the CEO, initiating a cash dividend, and in getting the firm to buyback its own stock. Representation on the target's board has a success rate of 73% (Klein & Zur, 2006).

Although intertwined, I will highlight the results of hedge fund activism on two company aspects (corporate governance and shareholder value) separately.

a) Corporate governance

Briggs (2006) examines the impact of hedge fund activism on corporate governance. He concludes that the 50 US hedge fund activism situations during 2005 and 2006 proxy season hardly make hedge funds a direct and present threat to corporate America. Briggs says that it is too early to say whether hedge fund activism is profitable for the funds, value-maximizing for other public shareholders, or good for corporate governance in the United States generally. The certain benefit of hedge fund activism that Briggs derives from his study is that hedge funds can come up with sensible ideas, press companies to re-examine their businesses and to rethink their strategy (2006).

b) Shareholder value

Included in this point are the hedge funds themselves, again taking the view of Perrie Weiner, that shareholders of public companies in the US have interests that are almost perfectly aligned with those of activist hedge funds that have invested in the company (Harrison, 2007). From the viewpoint of the shareholders, hedge fund activism in general is indeed a good alternative strategy for hedge funds. Brav et al. conclude from their study that hedge fund activism generates positive abnormal returns. These returns were the highest when activism targets the sale of the company or changes in the business strategy (2006).

The activist hedge funds tracked by alternative investment consultant Cliffwater LLC had an average annualized return of 18.6% for the five years ended March 31 2006, compared with 9.4% for long-short equity funds in the Hedge Fund Research Inc. HFRI index for the same time period. Thanks to this five-year annualized returns which are more than twice those of the average long-short equity hedge fund, activist hedge funds increasingly draw the attention of institutional investors (Williamson, 2006).

Finally, the companies in the sample of Klein & Zur show on average abnormal stock returns of 10.3% during the period surrounding the initial Schedule 13D filing, which means that shareholder value increases because shareholders perceive benefits of reducing agency costs associated with excess cash and short-term investments (2006).

3.4. Institutional environments

The fact that the law systems and financial systems are strongly interlinked is shown by La Porta, Lopez-de-Silanes, Shleifer, & Vishny (1997). They show that in general common-law systems have a market-based financial system, while civil-law systems in general have a bank-based financial system. The relation of corporate governance to the law system and financial system appears from Shleifer & Vishny, who state that the fundamental question of corporate governance is how to ensure financiers that they get a return on their financial investment, hence that the legal protection of investor rights is an essential element of corporate governance (1997: 773). This is also supported by La Porta et al. (1998). They say that the content of legal rules in different countries may shed light on some corporate governance puzzles, like the fact that Germany has only a small stock market, but large and powerful banks, and the fact that ownership of large American and British company is so widely dispersed (1998). Berglöf, Rey, & Röell also confirm the strong link of law systems, financial systems and corporate governance; they say that real corporate governance reform will require fundamental changes in both legal and economic systems (1997: 116)

In this thesis I will look for differences of hedge fund activism goals, methods and results between two categories of institutional environments. One is formed by the common-law system with the market-based financial system. The other is the civil-common-law system with the bank-based financial system. Corporate governance is not categorized in this thesis, but corporate governance is often a product and a result of the law- and financial system.

For the sake of convenience, and because laws are on the basis of financial systems, I will primarily speak about 'common-law' versus 'civil-law' systems and countries, but the financial systems are always included. Main differences between the two will now be dealt with, while in chapter 3, where the two systems will be compared, more specific characteristics will be elaborated on.

Although La Porta et al. split the civil law further in French, German and Scandinavian civil traditions, I will mostly deal with them as one. One reason is that the dichotomous distinction by La Porta et al. and other authors remains intact. Another reason is that I have in my sample only one hedge fund activism case in Sweden, and that could produce a sample bias.

3.4.1. Origin and basic features

A common law system relies in particular on judge-made laws, which gives the system adaptability to (new) cases (Funken, 2003). Judges have to resolve specific disputes, and precedents from judicial decisions shape common laws (La Porta et al., 1998). Therefore common-law systems are more flexible, open-ended and evolve more easily; courts can introduce modifications to existing rules at any time (Siac, 2002).

3.4.2. Investor rights

Common law gives stronger rights to investors than civil laws (La Porta et al., 1998). This appears from the average anti-director rights, which is an index made by La Porta et al. of rights for investors including the right to mail a proxy vote to the company, the right not to be required to deposit at the company shares owned prior to the shareholders' meeting (which should prevent the shareholders from selling the shares for some days), the right of cumulative voting of minority shareholders for board representation, the availability of an oppressed minorities mechanism, right to call an EGM and pre-emptive shareholder rights that can only be waived by a shareholders' vote. La Porta et al. investigated for 49 countries these anti-director rights, and found that in common-law countries these rights were significant higher than in civil-law countries (1998).

3.4.3. Financial systems

La Porta et al. conclude that common-law systems mostly involve a market-based financial system and civil-law systems involve a bank-based financial system. They base this finding among other things on the following results of their study. Companies in common-law countries have better access to equity finance than companies in civil-law countries. The ratio of outsider held stock market to GNP is 60 % in common-law countries versus much lower ratios in law countries (21% for French law countries, 30% for Scandinavian civil-law, 46% for German civil-law countries). The number of initial private offerings was also much lower in civil-law countries (1997). La Porta et al. explicitly make the conclusion that low shareholder protection may be the reason why some legal origins have smaller equity markets as well as lower access of firms to equity finance (1997: 1137).

Levine empirically supports the view that the legal system importantly influences the financial sector development (2002).

3.4.4. Corporate governance

4. Research methodology

4.1. Data

4.1.1. Availability

One of the most difficult parts of this study was the gathering of data. For many studies in the field international business, data is available from annual reports, previous studies, existing databases, etc. But unlike most companies, hedge funds are not obliged to disclose detailed (financial) information, because they are not listed on a stock exchange and they are not registered investment companies (SEC 2003). Although the rules for registering with the SEC became stricter in 2004, (e.g. off-shore hedge funds with more than fourteen clients who are resident in the United States must register with the SEC now (SEC, 2004)) still far not all hedge funds have to register or disclose all company information yet. There even does not exist an authoritative estimate either of the number of hedge funds or of the value of their capital, partly only some voluntarily data is available according to Eichengreen & Mathieson (1999).

This problem of data availability applies still more to data on hedge fund activism. Therefore I will now deal with the data of this thesis in more detail.

4.1.2. Sample definition

When looking for hedge fund activism cases, no database with such cases can be used, simply because there does not exist such a recognized database to my knowledge. Also no central database of activist hedge funds exists (Brav et al., 2006). Because also no unambiguous definition of hedge fund activism exists, I will now start with the other studies of activism and end up with my own definition of hedge fund activism.

The only database with hedge fund activism cases I could find was in the study of Briggs (2006). He defines hedge fund activism, as already mentioned in sub paragraph 3.3.2, as 'any actual or overtly threatened proxy contest or any other concerted and direct attempt to change the fundamental strategic direction of any solvent United States public corporation other than a mutual fund'. The sample of activism cases Briggs uses contained 50 companies which seem to have become the 'subject of a significant hedge fund campaign' during the investigated period (2005 and the first 8 months of 2006). As already explained (paragraph 3.3.2), Klein & Zur (2006) and Brav et al. (2006) used for defining hedge fund activism cases Schedule 13D filings. I will not use this criterion, because it ignores the activism cases in which the hedge fund has less than 5% of the firm's shares and cases when the company involved is not publicly traded.

The first shortcoming of the previous studies is that they are limited to the United States. The second important shortcoming is that they only investigate 2 or 3 years (Briggs covered 2005-2006, Brav et al. covered 2004-2005, Klein & Zur covered 2003-2005). These important shortcomings will be covered respectively in paragraphs 4.1.3 and 4.1.4.

involved in 'any activity, beyond trading, meant to influence the strategy of a company'. At this point I recall the goal of this study, which is to investigate the effects of hedge fund activism, in relation to (political) concerns. These concerns are often related to the larger hedge fund cases, involving (attempts to) large strategic changes with huge (perceived) impacts, where hedge funds and management often do not agree and which often are extensively covered by the media. So the definition of a hedge fund activism case in this study is:

'Any significant and often controversial attempt to influence the strategy of a company, initiated and led by a hedge fund being a shareholder of the company '.

'Being a shareholder of the company' is important in the definition, because some hedge funds buy (large) amounts of debt in the company, and so being a creditor they try to influence the strategy of the company. But because creditors have pretty other rights and other characteristics than shareholders, they fall out of reach of this study.

4.1.3. Scope

The goal of this study is to give a worldwide, rather than a local picture of hedge fund activism. This contrasts with the few large studies in the field14_{; Brav et al. (2006), Briggs} (2006) and Klein & Zur (2006). Theses studies only investigate hedge fund activism cases in the United States. In itself this US-focus is understandable, given that, according to International Financial Services London (2007), in 2006 65% of all global hedge fund assets was located in the US. However, the share of Europe in the hedge fund assets increased from 12% to 24% from 2002 to 2006 according to the same source, which indicates that Europe is an important field of hedge fund activity by now. The share of hedge fund assets in Asia in 2006 was 8% according to the IFSL (2007).

Therefore, and because of the growing attention of European politics to the hedge fund activity, as indicated in the introduction, hedge fund activism in this study is not limited to a certain continent or country, but it will in principle deal with hedge fund activism over the whole world.

4.1.4. Time frame

Briggs (2006) starts his study in 2005, according to him the first year in which hedge fund activism received widespread notice. Whether this is true or not, and that is difficult to determine because 'widespread notice' is very subjective, I wonder if this does say something over the extent of hedge fund activism in the years before 2005. Because part of my research question deals with the development of hedge fund activism, I will go further back in time. Because I until now did not read of any significant cases before 1995, and due to limited data access, 1995 will be the starting point of my sample. The sample will stretch as recent as possible, while the cut-off will be approximately April 2007.

14 _{Although there might be other ones, these were the few large empirical studies on hedge fund activism I}