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The Pros and Cons of Hedge Fund Activism

The Pros and Cons of Hedge Fund Activism: How does it Impact Public Companies?

Hedge fund activism, also known as shareholder activism or simply activism, is an investment strategy in which a hedge fund or other investor acquires a significant stake in the shares of a publicly traded company and uses that position to influence the company’s management and decision-making processes.

Activist hedge funds use their own money as leverage to press for changes that they feel would boost shareholder value, such as divestitures, share buybacks, management changes, or the company’s sale. 

The purpose of hedge fund activism is usually to make money for the hedge fund’s investors by raising the stock price of the targeted firm.

The temptation to engage in activism might be great for hedge fund managers. Activist hedge funds have grown in popularity in recent years, with managers buying big interests in public businesses and advocating for reforms that they believe would boost shareholder value. Yet, like every investing strategy, hedge fund activism has advantages and disadvantages too.

In this blog, we will examine hedge fund activism to determine whether they are a savior or not. To find this out, we first need to understand what the goal of hedge fund activism is.

What is the Goal of Hedge Fund Activism?


What is the Goal of Hedge Fund Activism

The goal of hedge fund activism is to acquire significant holdings in a company’s stock and then persuade its management to make changes based on the firm’s and its shareholders’ interests. While hedge fund activism can result in big profits for investors and improve the performance of targeted firms, it does come with risks and costs.

Activist hedge funds often aim to enhance the target company’s performance by pushing for changes such as:

  • Corporate Governance Reforms- Changes to the board of directors and CEO compensation restructuring can be done.
  • Operational Adjustments- Cost-cutting strategies and enhanced capital allocation may happen.
  • Strategic Shifts- Diversification, mergers, and acquisitions can take place.

By exploiting their own position and influencing the firm’s decision-making process, activist hedge funds usually try to enhance the stock price of the target company and produce profits for their investors. Yet, their practices are frequently criticized, with some claiming that they emphasize short-term gains over the company’s long-term health.

In the next section, we will discuss the significance of hedge fund activism in public companies.

Importance of Hedge Fund Activism in Public Companies 


Importance of Hedge Fund Activism in Public Companies 

The following are some reasons why hedge fund activism is vital for public firms: 

  1. Enhanced Business Performance- Activist investors advocate for changes that they feel would boost the firm’s performance and raise shareholder value, such as cost-cutting initiatives, divestitures, or management changes. These activities have the potential to increase stock values and provide investors with better profits.
  2. Activist Investors- Activist investors frequently probe a company’s management and financial operations and demand greater transparency and responsibility. This can aid in the prevention of fraud and the promotion of good corporate governance.
  3. Enhanced Efficiency- Activist investors may advocate for improvements that might improve a company’s efficiency, such as simplifying processes or decreasing bureaucracy. This may result in cost savings and increased competitiveness.
  4. Shifting Market Condition- Activist investors may push for a change in a company’s strategic direction, such as entering new markets or divesting non-core assets. This can assist a corporation in adapting to shifting market conditions or capitalizing on new possibilities.
  5. Support For Their Initiative- Activist investors frequently interact with other shareholders to get support for their initiatives, which can improve shareholder involvement and help align management’s interests with those of investors.

Ultimately, the impact of hedge fund activism on public firms is a topic of a long discussion, with both possible advantages and disadvantages to consider.

Let us investigate if hedge activism is beneficial or not in the next section.


Pros & Cons of Hedge Fund Activism 


Pros & Cons of Hedge Fund Activism 

The pros and cons of hedge fund activism are determined by a number of factors, including the activist investor’s individual actions, the company’s aims, and the larger economic and legal backdrop. Here are some benefits of hedge fund activism:

Pros of Hedge Fund Activism :

  1. Improved Shareholder Value- Activist hedge funds frequently advocate for reforms that can boost the value of the target company’s stock. This can benefit all shareholders, not just hedge fund stockholders.
  2. Improved Corporate Governance- Activist hedge funds frequently seek changes to a company’s board of directors or CEO remuneration that can enhance corporate governance and decrease conflicts of interest.
  3. Increased Accountability- Activist hedge funds can hold a company’s management accountable for its actions and choices, ensuring that it acts in the best interests of its shareholders.
  4. Operational Efficiency- It is possible for activist hedge funds to force a company to make changes in its operations that can improve efficiency and profitability in the long run.
  5. Better Transparency- There is a possibility that activist hedge funds will pressure their target companies to become more transparent, which will benefit all shareholders.

So, these are some benefits of hedge fund activism. Next, let’s discuss the disadvantages of the same.

Cons of Hedge Fund Activism :

  1. Short-Term Focus- Activist hedge funds are frequently focused on short-term rewards rather than long-term sustainability. This can lead to short-term actions that reward shareholders but hurt the company’s long-term prospects.
  2. Increased Risk-Taking- Activist hedge funds may advocate for riskier techniques that enhance the volatility of the target company’s stock price.
  3. Conflicts of Interest- If activist hedge funds invest in rivals or other firms in the same sector, they may have a conflict of interest.
  4. Lack of Expertise- Activist hedge funds may lack the skills to comprehend the complexity of the target company’s operations, resulting in erroneous recommendations.
  5. Negative Impact on Employees- Employees may suffer as a result of activist hedge funds initiatives, such as job losses or changes in business culture.

Thus, these were the shortcomings of hedge fund activism. 

We have seen the goal of hedge fund activism, its significance in the public sector, and the pros & cons of the same. In the last section, let us look at an investment alternative that has been breaking all the records lately.

The Bottom Line 


The Bottom Line 

Hedge fund activism is a two-edged sword with both advantages and disadvantages. On the one hand, it can lead to higher corporate performance, accountability, and efficiency. Nonetheless, it may be short-sighted, disruptive, and possibly detrimental to long-term shareholder interests. Hence, like with many other aspects of life, the key to effective hedge fund activism is to have a long-term perspective and constantly remember that tremendous power comes with great responsibility.

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Ashish Verma

Ashish Verma is the founder and CTO of Secvolt, with close to 10 years of experience in the IT industry. He has been the technical backbone of the company and has worked tirelessly to make the technical infrastructure robust. He is a passionate entrepreneur who generates solutions that have the potential to bring change.

In order to ease the client’s interaction with Secvolt, he has strived to develop the business’s technological foundation and establish a user-friendly platform. Ashish has also contributed substantially to smoothening the company’s administration and ensuring that there are no lacunae in the broad structure of the organization. 

Early Years

Coming from a middle-class family, he was aware of the problems that people faced while using technology. He sought to create something that was simple to use yet had a powerful effect. As he studied computer science, he became eager to offer a solution to real issues. He began his professional career at Amdocs, where he gained expertise in client management while catering to more than 20 clients. Later, he moved to Citicorp, where he had exposure to the investment industry. His time at Amdocs and Citi enabled him to produce high-standard, efficient, and scalable technical infrastructure.

He left corporate jobs for his startup because he was passionate about working on the concept of a smart city platform. He expanded the concept internationally and even collaborated with Global Dignity-Kuwait. Things didn’t work out for him the first time. He states, “My failures didn’t stop me from experimenting and trying new things.” He rose from the ashes like a phoenix and founded FewerClicks, an End to End IT solution company.

He worked on the creation of Solster Finance, a decentralized financial platform based on the Solana blockchain. He created this platform single-handedly which has helped the team raise a $1M investment and a revenue of more than $5M within 6 months of launching. 

He has previously worked on many blockchain technologies and cryptocurrency ventures, which include Decentralized Finance Applications (Defi), Decentralized Applications (Dapps), File Contracts (SIA, record-keeper), Smart Contracts (rust, solidity), and NFT Development. His experience and effective communication have helped many team members understand Secvolt effectively and the underlying technology it is powered by.

He possesses the ideal combination of strategic thinking and excellent business insight. He is responsible for formulating technical aspects of the company’s strategy to guarantee alignment with business objectives. With his drive to experiment with new technologies, he has helped Secvolt achieve a competitive edge. Being in charge, Ashish never holds back in encouraging the different departments to make profitable use of technology, helping to grow as an unstoppable team at Secvolt!

Hanif Shaikh

Hanif Shaikh is the founder and CMO of Secvolt, with over 8 years of experience in the industry. He plays a crucial role when it comes to the growth of Secvolt. Since the beginning, he has acted as a mentor for each and every employee of the company, and he makes an effort to be accessible to his staff anytime they need him. 

Hanif first entered the Blockchain and Crypto world in 2016, and nothing has stopped him since. He views blockchain as a transparent platform that provides authority and accountability back to the people. He consistently believes that “overcommunication is better than miscommunication.” He has lived by this motto with his staff, clients, and networks.

Early Years

Hailing from Gujrat, a state in India, he is following his dream to contribute to making this world a better place. In the process, he has struggled, made some mistakes, and learned lessons from those mistakes to achieve success in life. His entrepreneurial attitude dates back to his childhood when he learned from his father’s business and aspired to have it all. He came from a humble background and had ambitions to succeed in life.

He has developed two successful businesses from scratch, and in the process, he has inspired young people to start their own businesses. He was an integral part of the Quora Mumbai Meetups and helped it become a great success in a short period of time. Later, he began organizing meetups to raise awareness about blockchain, cryptocurrencies, and their applications. He also shared his knowledge of ICOs, highlighted reputable ICOs, and established a small cryptocurrency community on WhatsApp groups.

He chose to go on a Blockchain Tour in India in 2019 and met some fascinating people. Throughout his journey, he has been able to build an extensive and robust network that has aided Secvolt’s growth. Because of his expertise and understanding of the Crypto Industry, he has been featured on several news channels and has advised the youth on the subject.

He is in charge of the company’s marketing operations and is responsible for developing its marketing strategy and vision. He oversees a group of passionate marketing professionals and plans promotional strategies with the goal of making  Secvolt a global brand. 

He is a perfect blend of a practical attitude and innovative business acumen. He believes in the ability of individuals to perform exceptionally well when given an environment to experiment and explore their passions; a culture that he has built at Secvolt.

Divakar Choudhary

Divakar Choudhary is the founder and CEO of Secvolt who has been trading for more than six years now. He started the business in 2018 with the conviction that if anybody could dominate the market, it was him. He poured all of himself into the business and turned Secvolt into a market-beating machine.

Divakar developed the fundamental quant models that perform risk management and capture alpha using his skills from the previous organization and his time spent in the market. In order to make the system effective, he backtested risk mitigation algorithms and worked on them for more than 4 years to produce results.

Early Years

He began his crypto journey in 2013 after getting his first gaming Laptop and melded in with the Blockchain community like sunbeams on the ocean. He created many YouTube channels at the age of 15 and businesses by the time he was 17. Technology has always piqued Divakar’s interest. He endeavored and succeeded at freelancing in his effort to achieve financial independence. However, he soon realized that freelancing would always keep him in the rat race, and the only way out would be to build a machine yielding generational wealth.

Soon, he started trading using his own capital but suffered a loss in the market. He says, “95% of people lose money & the rest 5% make money from the loss of those 95%.” He then began working on an effective technique to be included in this 5% after losing part of his own assets during the early stages of trading. He began evaluating quant strategies using statistical models.

With his methodology, he once produced a 20% ROI in a single month. With the zeal of creating something exceptional, he borrowed money from friends and family and generated decent returns for them using primitive quant models. Month after month, the system’s efficiency and the competence of the man behind it allowed for excellent market returns.

In the beginning, Divakar worked on his laptop for over 18 hours. It took every ounce of his energy as he executed about 530+ deals daily for 4 years to create this company from the ground up. In 2021, he increased his volume by 827%, trading a total of $52 million and hitting a single account.

In his words-

“What does becoming “THAT” GUY mean to you? Who did you need when you were young? Be that person!”

He is a perfect example of someone who followed his passion and made a fortune from it! He dreamt of creating generational wealth as a youngster, envisioned it as an adult, and is now making it a reality with Secvolt!