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Mergers, Acquisitions, and Corporate Restructurings, 6th Edition by Patrick A. Gaughan

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CHAPTER SEVEN7

Hedge Funds as Activist Investors

HEDGE FUNDS WERE DEVELOPED as an alternative to open-end investment funds or mutual funds. Managers of hedge funds do not make public solicitations for capital to investors in general and as such do not face the public reporting requirements that their mutual fund counterparts do. Since hedge funds do not face as great reporting requirements, investors have more limited access to return data.

Hedge funds grew dramatically during the strong economy that prevailed over the period 2003–2007 (see Figs. 7.1a and 7.1b). The number of hedge funds grew roughly doubled over period 2001–2007 where they peaked at 9,550 funds. Hedge fund assets grew similarly and reached 1.87 trillion in 2007. The subprime crisis and the Great Recession caused the industry to shrink and many of the “weaker players” left the business. However, fueled by large amounts of institutional capital to invest, growth resumed in 2009 and by 2011 both the number of funds and total assets under management surpassed their 2007 levels. This growth accelerated over the years 2012–2014.

Within the hedge fund category, however, we have two subgroups that are relevant to M&A. One is the risk arbitrage hedge funds, which we have already discussed. The other that we will now focus on is the activist hedge funds. These are funds that specialize in acquiring positions in targets that may be undervalued or that have other characteristics that make them vulnerable to activists. Sometimes ...

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