Question

essay question

2. Lately alternative hedge funds have become more activist funds (taking stakes in companies and gathering board representation) – what does that mean and what are the consequences of activist hedge funds in that companies and in the overall market. Please use examples discussed during out classes.

Answer 1

Activist hedge funds are investors that purchase shares of a particular company and and get active while gather board representation by being the voice of the shareholders on company's management board.

Investment of these activist hedge fund comes with a short term and long term consequences

1) In short term the companies stock value rise quickly but in later years the value falls steadily and hence in short term it is good for investors but in long term it goes negative.

2)As soon as the activist hedge funds targets a company, the corporate social responsibility projects are slowed down and focus is shifted to generating profit to the company as they want to maximize the financial performance of the company in short term .

3) As activist hedge fund targets any company there are immediate cut back on the operating expense, employee compensation as there will be job losses to increase the profitability of the company.

Consequences on a company shows positive effect in short term but in longer term it does not have positive effect on the company's growth and on overall market.

Trian Hedge fund is a good example of Activist hedge fund targeting the gaint in consumer goods P&G in 2016 which has led to a rise in the stock price of the comapany right after the investment by Trian hedge fund. Although Trian wanted to shut down it corporate R&D which would have affected the company's long term growth.