Discussion of He-Li: The Benefits of Friendship in Hedge Fund Activism Cambridge, February 2017 Moqi Groen-Xu, LSE

A Thought Experiment: The Value of Hostility in Hedge Fund Activism

A thought experiment Use social networks to study information dissemination during activist campaigns Are funds whose managers are enemies of the lead activists more likely to increase their ownership in the target firm? Do enemy funds earn significantly higher returns? Do enemy funds contribute to the failure of activist campaigns?

Measurement: who are the enemies? Public battles (e.g., Icahn vs. Ackman)... ... private battles... That rival from the same school who married my girlfriend That guy from the same internship who got hired That annoying person who is also on the board and always cuts me off ... competitors: the entire asset management industry? Taste-based discrimination?

Friends vs. enemies Friends Enemies May have private information from the lead activist May give information to the activist May have private information from the same source as the activist May want to vote for the activist If friendship known: can be used to increase activist’s ex-ante negotiation power May trust the activist’s skills Has no private information from the lead activist Will not give information to the activist May have private information from the same source as the activist May want to vote against the activist May want to discourage the activist May believe in benefit of activism in general May want to use the news buzz around the announcement/the fight

Tests Friends Enemies Tests May have information from the activist May give information to the activist May have private information from the same source as the activist May want to vote for the activist May trust the activist’s skills Has no information from the activist Will not give information to the activist May have private information from the same source as the activist May want to vote against the activist May believe in benefit of activism in general May want to use the news buzz Connections predict purchase Up/downstream connections Evidence from dates of insider trades/trading dates Reciprocity? Connections predict success and returns Channels of success: voting, negotiating Timeline of buying/becoming target Returns conditional on success/failure

Questions about interpretation The friends story Activists offer information to friends in return for support Friendship helps the activist succeed Some missing links Success rates. Do the ties indeed help the activist in success? What are success rates for campaigns with no connected trades / for activists with no ties in the industry? Selection into investing. Why do activists not enlist their friends in all campaigns? Are some campaigns riskier? Less in need of support? Or do the friends only invest in campaigns they deem worthwhile (higher success rates and returns)? Why then does the activist not listen to the friends and not invest in some of them? Perhaps they first approach friends that already have a large investment? Channel. Evidence for voting or negotiation power? Exclusivity. Can non-friends replicate the returns by observing the connected investments?

Implications Activist connections are related to investment, return, and campaign success: Key benefits from friendship and education in the activists sphere Connections = one of the value-enhancing characteristics of a good activist? Very interesting paper, highly recommended reading Let’s be friends