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Net Net: Promoting innovation and managing change

Activist hedge funds shrug off SEC collusion inquiry

SEC probes activist hedge funds to see if they colluded: DJ
SEC probes activist hedge funds to see if they colluded: DJ

The Securities and Exchange Commission appears to have its sights on activist investors, but the hedge fund industry isn't concerned about a crippling crackdown.

The SEC is investigating whether some activist investors illegally teamed up to target companies without properly disclosing their alliances, The Wall Street Journal reported late Thursday, citing unnamed sources.

The SEC declined to comment to on the report. But hedge fund managers and their clients contacted Friday didn't react with alarm.

"It doesn't concern me," said one activist hedge fund client, noting that coordination was not a common strategy and any group impacted would be small. "It won't affect their ability to operate."

"It's not scary," added an activist manager about news of SEC investigations. "I wish they would spend their time on more useful things."

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Which firms the SEC is investigating was unclear.

Hedge fund managers likely don't have to tell their clients of an initial government letter requesting information—which some got, the Journal reported—according to hedge fund investors and industry lawyers. Firms are only likely to tell their clients of an inquiry if it's material to their business. An SEC investigation is a civil matter, not a more serious Department of Justice criminal probe.

Money managers are allowed to discuss trade ideas before investing, but they are required to disclose that they are acting in concert if their combined stake in a stock totals 5 percent or more. Another common trigger for a group disclosure is when an investor files a proxy statement in an attempt to change something at a company through a shareholder vote.

Recent hedge funds to team up publicly include Pershing Square Capital Management and Sachem Head Capital Management on Zoetis; Barington Capital Group and Macellum Advisors on Children's Place; and Corvex Management and Related Funds Management on Commonwealth REIT.

Having multiple hedge funds in the same stock doesn't always mean coordination.

Trian Fund Management and Marcato Capital Management both invested in Bank of New York Mellon with different views on the future of the company, for example, and Barington and Starboard Value appear to have unintentionally bumped into each other on Darden Restaurants.

"When a company is underperforming, it makes sense multiple activists will be involved," a manager told

The person added that companies were often sensitive to being targeting by groups, making activists extra careful legally: "We make sure we cross every 't' and dot every 'i.' "

Major activist firms either declined to comment or did not respond to requests for this story, including Pershing Square, Third Point, Elliott Management, Sachem Head, Starboard Value, Trian, Jana Partners and Marcato.

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The billions of dollars controlled by many prominent activists means it's more likely that they can act alone in pushing for change at a company.

"I don't believe successful activism requires ganging up on companies or creation of so-called 'wolf packs,' " another activist said, noting that they had never gotten a call from another activist in advance of targeting a company. "At the end of the day, an activist can bring about change if he has the right arguments for creation of value."

"I think it is healthy for this to be looked at by SEC," the person added. "I don't think they will find widespread collusion."