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The question posed was, "Who Bleeds When the Wolves Bite?"
It's the title of an evocative paper written by Leo Strine, the chief justice of the Delaware Supreme Court. By wolves, he means hedge funds, and his answer, found within a 113-page paper set to be published next month in the Yale Law Review, is that average American investors are the ones getting bit by the existing corporate-governance system.
While little known in circles outside the highest ranks of corporate America, Strine's voice is among one of the most powerful in the business community. That's because two-thirds of American companies are legally based in Delaware, meaning corporate litigation often takes place in that state, so his opinions on such topics can hold tremendous sway.
Strine's paper is one of the strongest repudiations to date of hedge-fund activism — or what critics of the industry describe as the practice of investors with major stock holdings aggressively forcing companies into changes that will quickly pump up stock prices, often without regard for those same companies' long-term health.
Strine looks at what he calls a "flesh and blood" perspective on how hedge funds, and specifically hedge-fund activists, are harmful to typical American investors. He calls regular Americans "human investors," distinguishing from the "wolf packs" of hedge funds. Human investors are those who invest in the capital markets and save for events like retirement or college for their children, according to Strine.
Strine's main argument is that the "current corporate governance system ... gives the most voice and the most power to those whose perspectives and incentives are least aligned with that of ordinary Americans."
That has allowed such investors to act and manipulate decisions by corporations that often are not in the long-term best interest of average shareholders, he said. He points to the "continuing creep toward direct stock market control of public corporations," which he says bears no accountability toward human investors.
He argued that a 10-year lockup in a private equity fund-of-funds would be a far "more rational" choice for those saving for retirement than a mutual fund would be, because it aligns better with the longer-term investment horizon. However, current regulations make that an unlikely option for most investors.
Strine's critics — largely hedge funds and hedge fund advisers — privately criticized the paper, arguing that a justice should not be on the record condemning a group of people who tend to litigate in his court and the lower Delaware courts. Additionally, they say his paper does not offer much in the way of prescriptions for how to fix what he sees as a flawed system.
They declined to be quoted, fearing retribution from Strine.
Strine declined to comment beyond the paper.
As performance continues to dwindle within the hedge-fund industry, the rallying cry against them (and specifically their short-term-minded reputation) has gotten louder. One group, including Jamie Dimon, the chief executive officer of JPMorgan Chase, Larry Fink, the chief executive officer of BlackRock and Warren Buffett formed a group about a year ago to try to find solutions for corporations to be more long-term focused. Buffett separately took aim at hedge funds and the fees they charge.
Strine said earlier in the decade that investors believed hedge funds were akin to Shakespeare, writing "A Midsummer Night's Dream," until 2015 unveiled "record-breaking poor performance." He said hedge funds' 2015 reports read like a "disgraced politician's 'mistakes were made' speech."
"There is less reason to think they are making the economy much more efficient," he said, referring to hedge funds, "and more reason to be concerned that they are perhaps pushing steady producers of societal wealth on a riskier course that has no substantial long-term upside."