CWA and SOC Investment Group find Elliott intervention drives underperformance by target companies over three-year period
NATIONWIDE — Elliott Management, one of the largest and most prominent activist hedge funds globally, is undermining the long-term health of companies it targets with its activist campaigns, according to a new first-of-its-kind report published today by the Communications Workers of America (CWA) and Strategic Organizing Center’s Investment Group (SOC Investment Group). The report, “Activist Hedge Fund Risks to Pension Funds: The Case of Elliott Management,” shows that Elliott Management’s activist interventions impair the stock and bond returns, as well as the operating performance, of its target companies, even while Elliott limited partners endure risk-adjusted returns consistently below those of public markets benchmarks. As a result, target companies are financially struggling long-term while investors’ public pension funds are overpaying in fees for Elliott’s unmet promise of outsized returns.
The report finds that Elliott’s target companies’ performance declines in the three-year period following an Elliott intervention, while target company debt increases, employment and wages fall, investment is reduced, and share buybacks increase, reinforcing the widespread critique of hedge funds as cash extractors that ultimately leave target companies smaller, weaker, and poorer.
The report comes months after U.S. Treasury Secretary Janet Yellen reignited the Financial Stability Oversight Council’s Hedge Fund Working Group, an indication that regulators, elected officials, investors, and interested parties are taking a deeper look into the problematic practices of hedge funds. This increased oversight follows growing concerns around hedge funds’ portfolio diversity, high fees, debt-financing, and long-term rate of returns. Notably, from 2016 to May 2021, investors reduced hedge fund investments by approximately $160 billion, or 5.3%.
Key findings from the report include:
- Elliott Negatively Impacts Its Portfolio Companies: Over a three-year period following an Elliott intervention, Elliott’s portfolio companies’ total market return relative to risk, revenue, earnings, leverage, debt coverage, and return on assets underperform an objectively identified set of control companies.
- Elliott’s Funds Broadly Underperform: Elliott Management funds underperform on a risk-adjusted basis readily available public investments such as a 60/40 blend of stocks and bonds that has less volatility and risk.
- Elliott Negatively Impacts Public Pension Funds & Hedge Fund Activism Negatively Affects the Stock Market More Broadly: Because Elliott’s targets are widely held, Elliott’s limited partners bear this negative, long-term impact on their own public equity portfolios. Since most pension funds allocate more assets to public equity than hedge funds, the negative long-term effect Elliott and other activist hedge funds have on public companies may dwarf any benefit pension funds receive as an Elliott limited partner.
- Elliott Increases Trading Costs: Analysis of bid-ask spreads at companies Elliott has targeted and where it has appointed or approved a director indicates a statistically significant increase in such spreads in the year following Elliott’s intervention, as compared to the control companies. In addition to increasing trading costs for all shareholders, this increase in the bid-ask spread may indicate an increase in information leakage from companies following settlements with Elliott, which has been theoretically linked to insider trading.
“For years we’ve been watching as activist hedge funds extract cash from their target companies, resulting in job cuts and a failure to invest to support long-term company growth,” said CWA President Chris Shelton. “Elliott Management, one of the world’s largest activist hedge funds, has been at the forefront of this in critical sectors like telecom and energy, using bankruptcies and proxy contests to achieve its own short-term gain before exiting. Our report clearly outlines the lasting financial consequences this has for target companies and the negative knock-on effects for pension funds and other investors.”
Increasingly over the last year, hedge funds have attempted to counter their negative reputation. This summer, the Managed Funds Association, of which Elliott is a member, launched an ad campaign, “Investing in Opportunity,” to convince Americans and elected officials that hedge funds enable retirement security for teachers, firefighters, and other working people. Meanwhile, hedge funds have underperformed the S&P 500 every year since 2009, putting into question the benefits of higher risk investments that Elliott has to offer.
“For a decade and a half pension fund trustees have been encouraged to address concerns over long-term funding by seeking out risky, supposedly high-return investments in hedge funds,” said SOC Investment Group Research Director Richard Clayton. “And activist hedge funds like Elliott have in particular presented themselves as advocates for good corporate governance and shareholder accountability. This report demonstrates that the reality could not be more different: when Elliott targets a company, that company’s operating and financial performance declines, its debt increases, and all of its public investors – both stock and bond holders – suffer from a long-term decline in prices, profitability, and productivity. All pension fund officials, including those who have no hedge fund investments, should recognize the danger this kind of activism poses to their fund, and join us in pressing for real accountability for Elliott and other activist hedge funds.”
In developing this report, CWA and SOC Investment Group identified all campaigns against companies led by Elliott Management between 2010 and 2020 using data from regulatory filings, professional reports, and third-party data providers. The analysis included innovative techniques to compare Elliott’s activist targets with a group of look-alike control companies.
About Communications Workers of America
The Communications Workers of America represents hundreds of thousands of workers in private and public sector employment. CWA members work in telecommunications and information technology, the airline industry, news media, broadcast and cable television, health care, public service and education, manufacturing, and other fields.
About SOC Investment Group
The SOC Investment Group, formerly known as CtW Investment Group, works with pension funds sponsored by unions affiliated with the Strategic Organizing Center, a coalition of four unions representing more than four million members, to enhance long term shareholder value through active ownership. These funds have over $250 billion in assets under management.