We recently compiled a list of the 15 Most Feared Activist Hedge Funds. In this article, we are going to take a look at where Engine No. 1 stands against the other feared activist hedge funds.
Activist investors are a force to reckon with, given their profound impact on companies worldwide and their influence on investor’s actions. They stand out from normal investors in buying large stakes in publicly traded companies to effect changes that they believe will unlock additional value.
While public pension funds and mutual funds also participate in stock activism, activist hedge funds often hold significant positions and use extra leverage from derivatives such as stock options to compensate for the costs of such campaigns. Additionally, activist hedge funds acquire positions in struggling companies just before advocating for change, aiming to benefit from the ensuing improvement and increase in stock value.
Activist investors declare their initiatives by submitting a Schedule 13D form to the U.S. Securities and Exchange Commission (SEC), which must be submitted within ten days after acquiring 5% or more of a company’s voting class shares. They often initiate their campaigns for board positions in the early months of the year, as they prefer to introduce new members to the board just before the company’s annual general meeting they aim to influence.
READ ALSO: Shake-Up Alert: 40 Companies Facing Activist Pressure.
In contrast to private equity groups that purchase and transform businesses to make a profit upon their sale, activist investors rarely obtain complete or controlling ownership. Instead, they rely on public statements and confidential talks to gain support from other shareholders and within the company. Should these strategies not succeed, an activist investor might seek a proxy battle to install new board members, aiming to compel the company to fulfill their requests.
A company might attract the attention of the most feared activist hedge funds if it needs to be better managed or has high expenses. In some cases, it might be targeted if the investors wish to take the company private or plan to push for the sale of some units as one way of unlocking additional value. It might also be targeted if the activist investors believe it is a problem they can fix to generate more value.
While activist hedge funds’ modest goal may be to advise company management, in most cases, they are known for their aggressive actions. They push for seats on the board as one of the ways of influencing a company’s strategic direction through decision-making. Some activist investors have gained prominence for forcefully entering into failing businesses and subsequently pushing for management changes, warning off board members—and occasionally, even CEOs.
However, the majority of activist campaigns take place behind the scenes. Roughly two-thirds of the battles occur behind closed doors, whereby agreements are reached without the public ever knowing. It’s only when activist hedge funds or investors feel they are getting a cold shoulder from management or board that they go public in a bid to win shareholders’ support.
Elliott Management is arguably one of the most feared activist hedge funds as it has targeted some of the biggest companies and taken on some of the most prominent investors, including Warren Buffett. Nevertheless, it is not the only one in the highly competitive field, as Starboard Value L.P. and Trian Partners, among others, are always looked upon by investors looking for highly undervalued stocks with tremendous upside potential.
2023 was one of the most successful years for activist hedge funds as they roared back to life on losing an average of 16% in 2022. As the overall stock market turned bullish in 2023, with the S&P 500 rallying by 24%, activist investors generated an average return of 20.2%, erasing a significant chunk of the losses accrued in 2022.
Some of the most feared activist hedge funds that came out on top included Value Act Capital, which posted a return of 39% better than the S&P 500. Caligan Partners was also up by 37% and Engaged Capital posted a return of 29%.
As interest rate hikes and other factors slowing growth hurt some companies, activist investors successfully pushed for cost cuts, management changes, and strategic alternatives. Many boards only realized too late that it takes more than refreshing directors to offset down performance in today’s climate.
In the first six months of 2024, the 15 most feared activist hedge funds launched a record number of campaigns. Investment firm Barclays tracked 147 activist campaigns, a new record from the previous high of 143 campaigns in the first half of 2018. In the second quarter alone, there were 86 campaigns, with Elliott Management launching 11 campaigns and committing close to $11 billion in capital.
The increased activist campaigns threaten to trigger costly battles between activist shareholders and management amid the push for leadership changes, spin-offs, and outright sales of underperforming companies or units.
Our Methodology
After sifting through numerous media reports from the past and the present, we curated a list of the most prominent activist investors. We then picked the hedge funds with the largest portfolios and ranked them in ascending order of their portfolio sizes, as of Q1 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Aerial view of a major oil rig in the middle of the sea, pumping crude oil.
Engine No. 1
Portfolio size: $84.48 Million
Founded in 2020 by Christopher James, Engine No1 is one of the most feared activist hedge funds on Wall Street and the smallest given the size of its portfolio. The hedge fund controlled about $84.48 million worth of portfolio at the end of the first quarter of 2024.
The little-known hedge fund burst into the scene in 2021 as it pushed for board seats at oil giant Exxon Mobil Corporation (NYSE:XOM) despite holding a 0.02% stake. Ultimately, it ended up securing three seats on the board, gaining the much-needed say to influence Exxon Mobil Corporation (NYSE:XOM)’s decision-making process, especially concerning climate change matters.
The prolonged proxy battle garnered support from prominent investors like BlackRock and Vanguard. These actions differentiate them from the strategy that propelled Engine No. 1 to prominence: its powerful and effective battle against Exxon Mobil Corporation (NYSE:XOM). It made other companies and their consultants nervous and highlighted a new category of small yet assertive activist shareholders capable of securing tiny shares and advocating for modifications.
Nevertheless, the hedge fund has always insisted that public proxy fights as part of stock activism are not core to its strategy. Instead, the chief investment officer and founder, Chris James, insists they operate as average investors with activism a toll of last resort rather than a core strategy.
Overall Engine No. 1 ranks 15th on our list of the most feared activist hedge funds. While we acknowledge the potential of XOM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an A.I. stock that is more promising than XOM, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.
