Gregg Hymowitz, the money manager who began backing activists such as Carl Icahn and Warren Lichtenstein more than a decade ago, is seeking to capitalize on a wave of hedge funds now pushing for changes at companies from Apple Inc. to Microsoft Corp.
Entrust Capital Inc. raised about $600 million in late 2013 to allocate money solely to funds run by shareholder activists, Hymowitz, who heads the New York-based firm, said in an interview. The money raised includes the Entrust Global Activist Fund LP, a fund of funds opened in November that is investing with money managers including Jeffrey Ubben and Nelson Peltz.
“What we have seen in the institutional world is continued disenchantment with the traditional long-only” managers, Hymowitz said. “Activism from an academic and real return perspective has proven its worth.”
With more institutions backing shareholder activists and a growing number of managers employing the strategy, even the largest U.S. companies have come under pressure. Icahn last year pushed Apple to return more cash to shareholders, while Ubben’s ValueAct Capital Management LLC did the same at Microsoft, a person familiar with the matter said last year. Almost 450 funds targeted companies for activism in 2013, a 17 percent increase from the prior year, said Damien Park, head of Hedge Fund Solutions LLC, which compiles data and consults on activism.
“A lot of the traditional non-activist funds recognize that these activists are generating significant alpha,” Park, whose firm is based Doylestown, Pennsylvania, said in an interview, referring to the ability of managers to provide returns that exceed those of the stock market. “So they are interested in joining the fray.”
Rather than investing in securities, a fund of funds specializes in allocating client assets among various money managers, charging fees in return for its expertise in vetting and then selecting the best offerings.
Entrust Global Activist is allocating its assets among as many as 10 hedge funds, including Ubben’s ValueAct, Peltz’s Trian Fund Management LP, and Cliff Robbins’s Blue Harbour Group LP, according to Hymowitz. The fund’s goal is to generate annual returns that exceed those of the Standard & Poor’s 500 Index by 300 basis points to 500 basis points, net of fees, Hymowitz said. A basis point is one-hundredth of a percentage point.
Hymowitz, 48, worked as a merger and acquisitions attorney for law firm Skadden, Arps, Slate, Meagher & Flom LLP and as a vice president in the private client group at Goldman Sachs Group Inc. before opening his own firm in April 1997. Early on, he had invested with activist managers such as Icahn, who is agitating for share repurchases at Apple, and Lichtenstein, the investor who runs Steel Partners LLC. Hymowitz said Entrust Capital has about $2.2 billion, or 22 percent of its assets with activist managers.
Michael Schlachter, a managing director in the pension-consulting division of Los Angeles-based Wilshire Associates, said he hadn’t heard of a lot of demand for a fund of funds devoted solely to activist managers, who traditionally have represented a sliver of the $2.5 trillion hedge fund world. That could be changing, according to Hedge Fund Research Inc. of Chicago, whose latest data show that assets under management at activist firms jumped 35 percent to $89 billion in the first nine months of 2013.
Hedge funds provided an average return of 7.4 percent during 2013, according to data compiled by Bloomberg, while the S&P 500 posted a total return of 32 percent, marking the fifth consecutive year that the industry trailed the U.S. benchmark. Hymowitz said the underperformance could help activist funds win assets from traditional long-short equity funds, while warning that the strategy’s popularity may attract many imitators.
“What you have to be careful about is you are going to have more and more guys calling themselves activists,” Hymowitz said. “Soon everyone and their mother will be an activist.”