Hedge Funds: Friend or Foe?

First, thank you Danielle, and all the folks at Concurring Opinions for allowing me to moonlight here, away from my blogging home at The Conglomerate.   I have noted in posts at the Glom that I am teaching a Shareholder Activism class this semester.  Right now we are in the midst of talking about different types of shareholder activists.  But it seems like the students are particularly intrigued by hedge funds–and I think a lot of their interest has to do with the fact that hedge funds tend to have a “boogeyman” reputation.  That is, there is an impression that hedge funds tend to engage in actions that are not in the best interests of other shareholders, or the corporation, or perhaps anyone for that matter.  So we spend time trying to figure out whether or not this impression is accurate.  Is the hedge fund a friend or foe?

There are articles suggesting that while hedge funds pose problems, they also “hold great promise as active shareholders.”  Other articles reveal that hedge funds engage in a variety of different activities, and hence, at the very least, it is not appropriate to paint them all with the same brush.  That is, some engage in extremely aggressive actions that appear to focus only on short-term profit, while others have more long-term goals.  Then too, even when you consider the actions of one hedge fund, it sometimes may be difficult to assess how we should view their conduct.  Take for example The Children’s Investment Fund or TCI.  (One of the reasons TCI found itself in the spotlight was because it engaged in a proxy fight with CSX that led to a lawsuit with some important implications about proxy fights and how shareholders’ ownership interest should be counted.)  On the one hand, TCI takes its name from a Foundation that gives money to support children in developing nations.   A Business Week article notes that TCI gives the equivalent of .5% of its assets to the Foundation.  Which some call a marketing tool, but, according to Business Week, amounted to an $18 million donation in 2004.  In fact, although it’s only been around since 2002, the Foundation is now one of the largest charities in the UK.  One of its 2007 donations apparently was the largest ever made by a Briton in a single year.

On the other hand, in describing its actions relative to CSX, Judge Kaplan of the SDNY opened his opinion with these words:

Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so.  A few cross that line and, if caught, seek to justify their actions on the basis of formalistic arguments even when it is apparent that they have defeated the purpose of the law.  This is such a case.

Wow.  I’m guessing Judge Kaplan believes hedge funds, or to be more precise, this particular hedge fund, doesn’t get to be put in the friend category.

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