Hedge Fund 'Wolf Pack'
Attention all you hedge-fund wolfs out there: Your pack is being stalked by some Washington lawmakers.
Two Senate Democrats introduced a bill that would reduce the time large shareholders have to report stakes of 5 percent or more in a company to two days from 10. (Here's a good New York Times article with all the details.) The idea is to prevent "wolf packs" of fund managers from forming after a lead fund tips off the other wolves that it's planning to disclose a large stake.
This is sort of ironic timing for this bill, considering one of the alpha wolves of the hedge-fund world -- the silver fox himself, Bill Ackman -- and his pack just ran swiftly over a cliff chasing pharmaceutical riches with Valeant. We think of Ackman as more of a lone wolf, of course, but large packs tend to form behind him without invitation.
In fact, a review of the news of the week makes us worry about the general health and well-being of some of our favorite 2-and-20 wolves. If this week's 60 percent faceplant in Valeant wasn't enough, consider some of the other headlines:
-- Lansdowne Partners' main fund lost 3.2 percent in the first four days of March.
-- Hedge-fund shutdowns outnumbered startups last year for the first time since 2009, as Will Wainewright reported.
-- As Oliver Renick's math shows, Russell 3000 Index companies with the highest hedge-fund ownership have fallen harder than the Virginia basketball coach, plunging 31 percent since July.
So, yeah, the whole "wolf pack" bill may be the least of the worries out there. But now that the pressing mystery of the week -- how on Earth did Yale manage to outrebound Baylor? -- has been solved, it's worth pondering the implications of this bill. (Even though it's hard to imagine it being passed anytime soon because Congress can barely agree on a lunch order, let alone Democrat-sponsored legislation like this.)
Playing the role of Little Red Riding Hood in this wolf tale are Senators Tammy Baldwin of Wisconsin and Jeff Merkley of Oregon, with support from Elizabeth Warren and Bernie Sanders. They named it the "Brokaw Act" after a Wisconsin town that lost a century-old paper mill amid the fight between Wausau Paper and hedge fund Starboard Value that's become Exhibit A for critics of what's often called short-term "quarterly capitalism," in which activists push for share buybacks and bigger dividends instead of investments in the business and its employees.
This is a huge and important debate in America. But it's one without a clear and easy resolution, especially because there's a good argument to be made that the blistering pace of corporate buybacks is the only thing that's kept the bull market in U.S. stocks alive. Obviously, encouraging investments in people, plants, R&D and the like seems on its face like a good long-term idea for many companies and the economy as a whole, but trying to force it through legislation seems specious.
"This legislation," the pitch goes, "removes the opportunity for riskless gains that activists achieve by shortening the 10-day disclosure window to 2 days." How so? Couldn't the head wolf just assemble his pack more quickly, or buy a 4.99 percent stake and then alert the rest of the pack before buying the final shares?
Another element is to end "secret net shorts" by requiring disclosure of derivatives positions that allow funds to secretly bet against a company they are invested in:
Derivatives are part of every activist’s toolkit. In some cases they are used to create a `net short' that allows the activist to profit by secretly voting against the company’s interests. Currently, derivatives and other synthetic instruments do not require disclosures despite the fact that they can have substantial impacts on the price of the security and its issuer. This can allow funds to secretly bet against a company they are invested in. This legislation strengthens oversight of these instruments...
How common is this? Typically, if an "activist" shorts a company, it's no secret and he lets you hear about it with plenty of speeches and slide decks.
To be sure, this bill is filled with good intentions. There is something inherently shady in activists forming a "wolf pack" to profit on nonpublic information. And the bill's proposal to force them to disclose when they're in cahoots is a nice idea, but impractical to enforce. Because even wolves from different packs howl at the same moon.
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