Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World

Chapter 14

Can't Be Them? Then Fund Them

Relations between institutional investors and activist hedge fund managers are growing from another perspective as well. Public pension funds with a moderate activist streak in them, such as the California Public Employees' Retirement System (CalPERS), began funding activists in the 1990s.

These relationships were born, in part, because of most institutions' diversified portfolio of miniscule positions and their conflicting incentives. As discussed before, public pension funds have so many positions that the costs of actively focusing attention on a particular company outweighed any benefits that could be attained from a reformed corporation. Investment banks, mutual fund managers and other institutions on the one hand want to bring in more fee business from corporate clients and on the other hand seek to press many of those same corporations into making changes to improve share value.

The conundrum that these situations result in has led many more-or-less passive institutions to invest with activist hedge fund managers rather than launch insurgencies on their own. Activists do what many institutions would love to do themselves but simply can't. “Institutions use activists as stocking horses,” says one investment consultant. “They become straw men for institutions.”

Probably the most important connection between activist fund managers and institutions is public pension fund CalPERS's relationship with activists David Batchelder and Ralph ...