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Are hedge fund operators like the corporate raiders of the ’80s resurrected in an even more virulent and villainous form, or crusaders protecting the small investor, aiming their prodigious power at ineffectual management and bloat?
One’s view of hedge funds depends on whether one is a target or a beneficiary of hedge funds’ newfound strength, panelists said October 11 at a discussion of hedge funds as new players in the mergers and acquisitions field. The event, hosted by the University of Chicago Club of Metropolitan Chicago and cosponsored by the Finance Roundtable, was held at Latham & Watkins’s Sears Tower offices.
“There’s still a great deal of fear over this particular class of investors by corporate management, I think mainly because they’re misunderstood, or they’re considered to be very short-term holders,” said panelist David Dolezal, a director in the investment banking department of UBS. Dolezal stressed that unlike the ’80s raiders, very few hedge funds seek to become company owners.
Hedge funds nowadays have little to do with hedging tactics. Instead, they are the new arena for wealthy investors, having evolved into private, unregistered, largely unregulated investment pools of huge amounts of capital. Hedge funds account for nearly a trillion dollars in assets, said M. Todd Henderson, assistant law professor at the University of Chicago Law School who is researching hedge funds’ role in the merger approval process.
These investors use an array of techniques. Unlike their more highly regulated private equity counterparts, they can use an unprecedented amount of leverage, Dolezal said.
Because hedge funds no longer are commanding the returns the fund managers have become accustomed to, hedge funds are increasingly acting as catalysts for corporate changes, buying up stakes in companies and then sending letters to management threatening a proxy fight and making such demands as stock buybacks, executive removal, asset sales, or company sales.
“Any public company can be a target,” said Erik Lopez, Latham senior corporate associate. “These are not necessarily troubled companies or small companies.”
Henderson suggested that there may be more of a concern about hedge funds than about the ’80s raiders, “but that may be misplaced.”
“Well, it depends where your bread is buttered,” responded Charles M. Nathan, corporate partner, Latham & Watkins New York office.
“In some ways, it’s capitalism at its best and worst,” added Mark Gerstein, corporate partner, Latham & Watkins Chicago office. With hedge funds “chasing so hard for near-term returns” it’s not clear that some of the choices being made are necessarily best for the overall growth of the American economy, he said.
When an audience member asked who in Congress is fighting off these raiders to protect the small shareholder, Gerstein replied: “The hedge funds would argue they’re protecting the small shareholder and I’m not sure they’re not.”
—Mary Sue Penn