David F.

Benkelberg

MODULE NUMBER
MBA 2006

INDIVIDUAL PROJECT
The influence of hedge funds on share prices

SUPERVISOR
Michael A.H. Dempster

Hand in date
Friday 31st August 2007

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This paper examines the extend to which hedge funds influence share prices of
publicly traded companies, by looking at 46 hedge fund related events in
Germany between January 2004 and July 2007. There are multiple ways through
which hedge funds could push up the price of a share, most notably through
direct activism, i.e. facilitating corporate change in the target firm that improve
performance as well as through playing out market psychology, i.e. making the
market believe that the target in current undervalued. Unlike related studies in the
U.S. which found that hedge funds do have a positive influence on target shares,
my research can not find proof for positive (or negative) abnormal returns
attributable to hedge funds. The mean abnormal return of the 46 events is only
2.2% when benchmarked against the market index and only 1.3% when
benchmarked against industry peers. Both values are statistically not significantly
different from zero and can therefore not be used as proof of the hypothesis that
hedge funds do have a positive influence. The different findings from the U.S. are
explained by the fact that Germany still stresses stakeholder value over
shareholder value and that shareholder activism isn’t a recognized part of German
corporate Governance.

There are, however, a few occasions where hedge funds evidently did have a
directly attributable (short-term) influence on share prices so that overall the
report concludes that while hedge fund’s influence on German shares is weaker
than in the U.S., in some cases hedge funds are able to make a difference.

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 ―Are powerful fundamental factors at work to
keep the market as high as it is now or to push it even
higher, even if there is a downward correction? Or is
the market high only because of some irrational
exuberance— wishful thinking on the part of
investors that blinds us to the truth of our situation?‖
Robert J. Shiller

3
Abstract ................................................................................................................. 2
1 Introduction................................................................................................. 5
1.1 Background.............................................................................................. 5
1.2 Objective .................................................................................................. 8
2 Hedge Funds ............................................................................................... 8
2.1 What is a Hedge Fund ............................................................................ 9
2.2 Types of Hedge Funds .......................................................................... 10
2.3 Activist Hedge Funds ........................................................................... 11
2.4 Implications for the Study .................................................................... 12
3 Share Prices................................................................................................ 13
3.1 Common Valuation Methods ............................................................... 13
3.2 Psychological Effects ............................................................................. 14
3.3 Random Walk ........................................................................................ 15
3.4 Can Hedge Funds Influence Share Prices? .......................................... 15
4 Quantitative Analysis ............................................................................... 19
4.1 Methodology ......................................................................................... 20
4.2 The Hypothesis...................................................................................... 24
4.3 Analysis of 46 Hedge Fund Related Events ........................................ 26
4.4 Findings ................................................................................................. 32
5 Conclusion ................................................................................................. 33
References ........................................................................................................... 36
Appendix ............................................................................................................ 39
A. Hedge Fund Events............................................................................... 39
B. Hedge Fund Event Data ....................................................................... 41
C. Performance Graphs ............................................................................. 42
D. Hedge Fund List .................................................................................... 57
E. Hedge Fund Managers ......................................................................... 61
F. Hedge fund strategy categories (as per TASS database) .................... 62

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 Hedge funds have already been around for over half a century. The first
hedge fund was founded by Alfred W. Jones in 1949 and it was called a hedge
fund because Jones hedged his long positions through using short positions. Jones
idea was to outperform the market while at the same time reducing his risk
through hedging and therefore he called his investment fund a “hedge fund”.
Nowadays hedge funds are widely known as very risky investments. The famous
hedge fund manager Mario Gabelli wrote in 2002: "Today, if asked to define a hedge
fund, I suspect most folks would characterize it as a highly speculative vehicle for
unwitting fat cats and careless financial institutions to lose their shirts" (McWhinney,
2005). In fact, research has shown that hedge funds indeed are highly speculative
and risky. Research by the European Central Bank (Garbaravicius and Dierick,
2005) estimates that first year failure rates of hedge funds are in the range of 2%
and 4%. A more detailed study by Chany, Getmansky, et al. (2005) found an
annual attrition rate of 8.8% for the period 1994-2003. The found that the risk
involved differs for different investment strategies and goes up to 14.4% attrition
rate for managed futures strategy hedge funds. Further, they estimate the average
liquidation probability for funds in 2004 is over 11%, which is higher than the
historical unconditional attrition rate of 8.8%. With a yearly attrition rate of 11% it
is fair to say that hedge funds are indeed risky investment vehicles. In July 2006
the Securities Exchange Commission (SEC) estimated that there were 8,800 hedge
funds, managing total assets of $1.2 trillion (Cox, 2006). With such large numbers
of hedge funds and high attrition rates it is not surprising that every year
hundreds of hedge funds are liquidated, yet once every few years, when a major
hedge fund collapses, such event is popularized in the news and the public gasps
in disbelieve at how such a large fund can collapse. Famous examples are Long
Term Capital Management in 1998 (which was probably the first time that many
people ever heard the term hedge fund), Tiger Funds in 2000 and very recently
Bear Stearns in 2007. Due to their high leverage and their sheer volumes (mostly
financed by leverage), financial distress of major hedge funds can cause an
avalanche, putting banks and private investors equally at risk. It is therefore of
little surprise that hedge funds receive an increasing amount of press coverage,

5
which, mostly reporting bad news, leads to ill feelings amongst the average
population.

12,000 $1,800
$1,600
Number of Hedge Funds

10,000
$1,400

Assets in billions
8,000 $1,200
$1,000
6,000
$800
4,000 $600
$400
2,000
$200
0 $-
1950 1971 1987 1993 1995 1997 1999 2001 2003 2005 2007

Source: Assets in $bn Number of Funds

Hennessee Group LLC

Figure 1 - Hedge Fund Growth

In April 2005 Franz Müntefering, former German Federal Minister of Labour

and Social Affairs, publicly called private equity firms locusts, and quickly,
through the yellow press, this term was adopted for hedge funds as well. Hedge
funds and private equity firms are confused by many Germans and both are seen
as equally greedy and destructive. Only shortly afterward Müntefering’s public
condemnation of private equity firms the G7 started talks about regulating hedge
funds and as of today their talks are still ongoing (Dougherty, 2007). The German
government has expressed concerns that a collapse in the hedge fund industry,
which could be triggered by the collapse of one of the big hedge funds, could lead
to global disorder. This is a rational fear, not only because hedge funds are
inherently risky and their numbers and their managed assets are increasing, but
also because they are not regulated and because their share on financial
transactions is much bigger than one would assume (Braun, 2007). Almost as a
proof of such a theory, the recent collapse of two Bear Stearn’s hedge funds has
caused ripple effects which as of today have already impacted two German banks.

According to the International Herald Tribune hedge funds are controlling assets
worth $1.4 trillion (Dougherty, 2007). Alpha Research Inc. estimates that the
largest 100 hedge funds alone manage $1.1 trillion (Rose-Smith, 2006) and further

6
estimates project hedge funds to grow 300% over the next five years (Schiller,
2006). These numbers by themselves are quite impressive. Yet, more relevant is the
finding that 40% to 50% of all trade at the U.S. and U.K. stock exchanges is
conducted by hedge funds (Braun, 2007; Schiller, 2006; Atzler 2005b). Considering
the value of assets controlled by hedge funds, their predicted growth rate as well
as and their already high level of trade, it is apparent that hedge funds have a
significant influence on today’s financial markets.

While it is therefore justifiable to assume that hedge funds have a

considerable impact on the stability of financial markets and share prices there is
only little quantifiable evidence of these assumptions. Some recent studies, most
notably those by Brav, Jiang, Partnoy and Thomas (2006), Klein and Zur (2006)
and Boyson and Mooradian (2007) are providing hard evidence that hedge funds,
on average, are not an evil but a blessing to the average shareholder in the way
that they act as shareholder advocates and agents for corporate change. All three
studies find that hedge fund activism generates between 7% to 10% abnormal
return with no apparent reversal over the following years.

Not surprisingly, most of the studies available on hedge fund activism and
its impact on corporate governance and on share prices are focusing on the United
States. The U.S. is the biggest financial market in the world with some of the
world’s biggest stock exchanges. Also, the majority of hedge funds is located in
the U.S. However, this doesn’t mean that hedge funds don’t operate globally. On a
global scale hedge funds “only” manage 5% of total global assets (Schiller, 2006),
but the biggest 100 hedge funds alone could completely buy Germany’s biggest 30
companies (the DAX30) and would still have spare money to spend (Süddeutsche
Zeitung, 2007). That’s of course only a hypothetical statement but recent estimates
show that 20%-30% of all German DAX and MDAX shares are owned by hedge
funds (Atzler, 2005a). This means that around one quarter of Germany’s biggest
companies is controlled by hedge funds.

Given the increase in hedge funds and the increase in assets managed by
hedge funds it is rational to assume that competition among hedge funds is
growing. Goetzmann and Roos argue that as a result of this increased competition
hedge funds are more and more investing in new regions and are using new

7
strategies. The overall goal that unites all hedge funds is that they are trying to
beat the market (Goetzmann and Ross, 2000). During the 1990s a lot of hedge
funds specialized in arbitrage trading (Goetmann and Ross, 2000), however, with
the increase in competition such arbitrage opportunities become more difficult to
find. As a result hedge funds are turning to alternative strategies, including hedge
fund activism (Klein and Zur, 2006) but they also invest more and more outside
the U.S, for example in Germany .

Since Franz Müntefering in his speech in 2005 called hedge funds “locusts”
hedge funds have gained significant attention by the German public. Müntefering
of course was not the initiator; he was only the catalyst that started a debate
throughout which hedge funds emerged as one of the great evils of the 21 st
century. This prompts the question if hedge funds in Germany are correctly brand
marked as locusts or whether they maybe even exert a positive influence on the
market as the above mentioned studies from the U.S. have found them to be.

I have explained that hedge funds have a quite substantial equity position in
the German financial market. Recent research on the U.S. market has shown that
hedge funds can have quite a positive impact on share prices and that their overall
influence is quite positive, whereas their image in Germany is that of short-term
investors who destroy companies like locusts.

In this paper I will explore the role that hedge funds in Germany really play.
I will verify if conclusions similar to those from U.S. studies can be drawn with
regards to the German market. More specifically, I will analyze if hedge fund
activity in Germany has a positive influence on share prices, i.e. if hedge funds,
through one way or another, increase the value of shares that they invest in.

Before diving into the analysis of the data I need to come back to the general
definition of hedge funds as this is relevant for the research. The objective of this
research is to analyze this impact of hedge funds on share prices, in particular for
the German market. I have already shown that in the public eye it is often difficult
to differentiate between hedge funds and private equity firms. Also, the objective

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of this study would lead to conclude that this research needs to include all hedge
fund activities. However, I have already referred to the subset of hedge funds,
namely activist hedge funds that play an important role. In this section I will
define what activist hedge funds are and why I focus on them rather then
including all hedge funds. Before I get to this, there are two key points that require
clarification: first, what exactly are hedge funds, and, second, what different types
of hedge funds exist.

Ronald Lake, a practitioner working for a large hedge fund, defines hedge
funds based on merely two characteristics: ―(i) they are commingled pools that are
offered via private placements to a relatively limited number of institutions and
sophisticated investors, and (ii) the manager receives an incentive fee” (Lake, 2003). That,
as he admits himself, is a fairly loose definition but at the same time it is also very
precise. The problem with hedge funds is that they indeed need not share many
common characteristics and the way they are trying to beat the market differs
quite substantially. Brav et al. (2006) take a similar approach and also define hedge
funds by their key characteristics but they find four common characteristics: “(1)
they are pooled, privately organized investment vehicles; (2) they are administered by
professional investment managers; (3) they are not widely available to the public; and (4)
they operate outside of securities regulation and registration requirements”. Especially
the last point, that hedge funds operate outside of securities regulation has
recently been a point of great concern and at the same time, poses a challenge for
any hedge fund related research. Since hedge funds are not regulated, they are not
obliged to inform anyone of their existence. They don’t have to register with a
central body and therefore no central data source exists that lists all hedge funds.

Despite their commonalities, hedge funds are not a homogeneous class of

investments; rather their commonalities are often restricted to the above four
points. How they actually invest their money differs quite substantially. There are,
however, sub-classifications of hedge funds which can help in understanding
which hedge funds are more and which are less relevant to this study.

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 Like all investment funds hedge funds aim to generate a return. Goetzmann
and Ross (2000) very nicely nailed this down to the point that the purpose of
hedge funds is to yield absolute returns above the benchmark of the riskless rate.
There are many ways hedge funds are trying to achieve this. The majority of
hedge funds describe themselves as long/short equity, which is close to what
Alfred Jones’s original concept of hedge funds stood for. Besides that, there are
many different approaches used to exploiting market opportunities. The TASS
database, which is still widely used by hedge fund managers, uses 11 broad
categories (see appendix for detailed definitions).

Convertible Arbitrage: The hedge fund manager focuses on discrepancies

between a convertible bond and the corresponding equity and “works the
spread”. For example, he buys a convertible bond and sells short shares of
the same company
Dedicated Short Bias: The manager emphasizes short positions in the
market
Emerging Markets: The fund manager focuses investments in securities of
companies from developing (emerging) markets
Equity Market Neutral: The hedge fund manager balances long and short
positions
Event Driven: The manager analyses opportunistically uses special events
such as merger situations (merge arbitrage), distress situations, regulatory
changes by anticipating how these events will influence the share price and
using long or short positions accordingly
Fixed-Income Arbitrage: The manager uses mixed short and long positions
of related bonds with different yields
Global Macro: The fund manager makes use of price differences of similar
investments in different financial markets around the world (relatively
mispriced)
Long/Short Equity: This strategy generically describes any strategy that
uses hedged investments in equities
Managed Futures: The manager seeks basis convergence from underlying
future prices in options

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 Multi-Strategy: Multi-Strategy is a combination of any of the above
strategies
Fund of Funds: The manager will invest in other hedge funds (at least two,
often more)

The above list is most likely not complete. In fact, the hedge fund market is
evolving quickly and once in a while new strategies appear such as risk arbitrage
(event related securities whose price differences imply different probabilities for
an event), and statistical arbitrage. There is also a special form of hedge funds
which could be classified as arbitrage or as event driven or as global macro but in
fact doesn’t quite fit into any of these categories and some refer to this category as
activist hedge funds.

Up until around 2000, most hedge funds profited from their ability to
identify and capture trading opportunities, mostly arbitrage opportunities
(Goetzmann and Ross, 2000). However, the rapid growth of the hedge fund
industry has made it more and more difficult for managers to identify and exploit
these arbitrage opportunities. As a result, many funds have turned to an
alternative strategy – hedge fund activism (and new regions such as emerging
markets) is just one example but one which is of high relevance to this research.

Klein et al. (2006) define hedge fund activism as a strategy “in which a hedge
fund purchases a 5 percent or greater stake in a publicly-traded firm with the stated intent
of influencing the firm’s policies”. I agree with their statement with the exception of
the 5% stake. The 5% stake is an arbitrary choice and the reason why they picked
5% is because that a 5% stake triggers a 13D filing to the SEC which makes their
research easier. There is simply no other reason. The key message however is that
activist hedge funds actively seek to influence the target firm.

In some cases, especially when facing strong opposition from the target’s
management, activist hedge funds form wolf packs or buy shareholder voting
rights through undisclosed transactions, for example through the stock lending
market (Hu and Black, 2006 and Christoffersen et al., 2006). Through such tactics
activist hedge funds are capable of influencing large international corporations of

11
which they otherwise had o means to accumulate a significant enough block of
shares (>5%) to exert enough influence.

The main leaning out of this is that activist hedge funds, while being a small
group, are the group of hedge funds which is most likely to have direct,
measurable impact on share prices, fundamentally for two reasons: First, it is their
strategy to increase the target’s share price through activism and second, they go
public about it which makes it easier to track and measure their influence.

Overall, there is neither a clear definition of hedge funds, nor a complete list,
and also there is no central record of the dealings of hedge funds. To a large
extend it is just not possible to track which hedge fund invested into which stocks
and when. This lack of data could be regarded as a considerable shortcoming to
this research, but I argue that to the extent that hedge funds trade on the market
anonymously, i.e. without anyone knowing when and into which stock they
invest, hedge funds are not any different from any other institutional investor
such as mutual funds. Arguably, they may have an impact due to the increased
volume of trade, e.g. the market is more, and there are fewer and smaller arbitrage
opportunities. However, overall, anonymously trading hedge funds act like other
institutional investors, which, as Karpoff (2001) and Barger (2006) have shown, are
unable to generate any abnormal returns despite their activist efforts. Therefore,
there should be no notable significant impact on share price movements
attributable to non-activist hedge funds1.

On the other hand, some hedge funds specialize in activism, i.e. they are
trying to actively influence the share price of certain stocks through different
means, primarily through putting pressure on management to initiate changes.
Such activist hedge funds do not act like normal, anonymous investors (Clifford,
2007; Boyson, 2007; Allaire et al. 2007). These activist hedge funds are those most
relevant for this research since they are explicitly aiming to increase share
performance.

1There is one exception though, namely small manipulations due to have trading and
rumours. Recently a claim has been made by an insider that hedge funds can and do
manipulate share prices as needed, i.e. if they have a short position they can manipulate
the price of the share to go down. Such claim hasn’t been substantiated yet and this kind of
exerted influence is beyond the scope of this research.

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 Finally, some private equity firms act similar to activist hedge funds. Since
many people in Germany can’t even tell the difference between the two and since
their actions are often alike, i.e. they buy blocks of shares in companies in order to
exert pressure onto them, I have included some private equity activism events in
my analysis as well.

Since in this study I focus on the influence of hedge funds on share prices it
is inevitable to take a small detour into the fundamentals of share prices. It is
important to understand what drives share prices in order to understand the
specifics of how a hedge fund could influence them.

Generally speaking, share prices express expectations. Owning a share is not

so much a matter of owning a part of a company, but it is in most cases primarily a
financial investment. Investors invest their money in shares in the expectation to
get a return. As regards shares, there are two sources of income for the investor:
dividend payments and an increase in the share price (capital gains). The price
that an investor is willing to pay for a share is thus dependent on the investor’s
expectations of future dividend payments and capital gains. Dividend payments
depend of the firm’s potential to pay dividends which in turn depend on the
firm’s earnings growth.

While most shares are bound to deliver a return, they are not equally likely
to do so. Investments in share aren’t equally risky and since shares aren’t the only
possible investment form they compete amongst each other and against other
investments such as bonds. A reasonable investor who has a large number of
investments to choose from will require a premium for the risk he takes: The
higher the risk, the higher the required premium.

Thirdly, the value of a share should be based on its potential to generate

future earnings. Such future earnings need to be evaluated. There are different
evaluation methods to do so but all methods share one important common aspect.
All evaluation methods are forward looking and therefore they are based on
assumptions: Assumptions on earnings growth, assumptions on interest rates, and

13
assumptions on risk. As with all assumptions, an investor can never be certain
about any of them.

To actually convert expectations into quantifiable numbers, investors apply

various valuation models. Two of the most famous models are the Dividend
Discount Model (DDM) and Free Cash Flow Analysis (FCF).

Like all other fundamental valuation methods the DDM and FCF valuation
models are calculating the value of an equity based on income streams, assuming
a yearly growth factor and discounting the income by a discount factor. The risk of
the equity return in these models is encapsulated in the discount rate. These
models may be overly simplistic and professional dealers are likely to rely on
much more sophisticated models, but the underlying flaws are still the same. It is
easy to see that expectations about income streams (regardless of whether they are
dividends or cash flows), about growth rates and about risk are all forward
looking assumptions and small changes to these assumptions often result in
significantly higher or lower valuations. More complex models may be more
sophisticated but they still rely on assumptions as input parameters. Quite often
the current market value is used as a reference point against which one’s own
valuations are benchmarked against. This is following one of the fundamental
theories that “the market” is efficient and that the bulk of buyers and sellers, when
in equilibrium, can’t be wrong. There is therefore a strong psychological (peer)
effect underlying most assumptions which normally biases towards the market
average.

Robert Shiller (2000), after analyzing the market of the 1990s, found that
prices are sustained not by real fundamental factors but by investor enthusiasm.
Many investors don’t buy shares because they believe in their real intrinsic value
or future dividend payments, but because they are certain they can sell the shares
to someone else at an even higher price. Simply speaking, “stock prices are driven by
a self-fulfilling prophecy based on a large cross section of investors” (Shiller, 2000).

Nowadays this effect is often referred to as the “greater fool” theory – there
is always a greater fool who will pay even more for the share. The greater fool
theory is also the reason behind stock market bubbles (Fisher and Statman, 2002).

14
If all investors relied on hard facts and fundamental evaluation methods than it
would be unlikely that large bubbles could ever exist.

In 1973 Burton Malkiel published his book “A Random Walk down Wall
Street” in which he introduced the “the random walk” theory. He suggested that a
blindfolded chimpanzee throwing darts at the Wall Street Journal could pick a
portfolio which would perform just as well as that of an expert. What he meant by
this is that share prices seem to go up and down randomly. Over the long term the
market will work efficient but in the short term it is impossible to predict if the
price of a share will go up or down and hence it is not worse the time or money to
even try to outperform the market. Hedge funds managers of course can not, by
definition, agree to such theories since the sole purpose of a hedge fund to achieve
just that, namely to outperform the market. I mention this theory for three reasons:
1. If the random walk theory holds, then also hedge funds should, over the long
run, not be able to outperform the market. 2. If my research finds that shares of
firms targeted by hedge funds outperform the market, then that would trigger a
follow-up questions, namely if this is due to the hedge fund’s stock picking skill
(contravening the random walk theory), due to the influence of the hedge fund
(e.g. activism), or due to pure luck. 3. If my research finds that hedge funds do
influence share prices (i.e. hedge funds are found to be the reason for share prices
going up or down), than the share price movement would be proven to not be
totally random which would open up arbitrage opportunities. If hedge funds
investments into a share do have an influence, than such hedge fund deals, i.e. a
hedge fund investing in a particular share, could become the trigger for other
investors to also buy the same share since at that point it becomes likely that the
share price is going up (or down if the hedge fund influence is negative). Such
situation would than lead to a self-fulfilling prophecy since many investor
jumping onto the wagon would increase demand for the share, resulting in a
higher price.

In this paper I am analysing the influence of hedge funds on share prices.

Now that we have reviewed the factors underlying share prices it is time to apply
that understanding to the question underlying this research. If the hypothesis is

15
that hedge funds do have an influence on share prices then this automatically
leads to another question: How is it possible that hedge funds influence the price
of a share? The share price, after all, is the equilibrium of buying and selling prices
which are based on assumptions around profitability, growth and risk. Common
theory would conclude that hedge funds ability to influence the price of a share
must stem from a direct influence on the underlying fundamentals (profitability,
growth, risk). If none of the fundamentals change than the share price shouldn’t
change, unless it’s a bubble. The question then is: Can hedge funds change the
underlying fundamentals?

If through activism a hedge fund could indeed make a firm more profitable,
i.e. generate more free cash flow and generate more growth, than that would
justify an increase in the share price. Klein et al. (2006) identify two strategies
through which hedge funds can improve the target firm’s performance. First,
hedge funds can alter the firm’s strategy, including the redirection of investments
to more profitable (and more risky?) projects but also by divestment, i.e. selling of
less-productive assets. Second, hedge funds can reduce agency cost by forcing the
firm to reduce its excess cash holdings which can be achieved by changing the
gearing, increasing dividends or paying extraordinary dividends or by buying
back shares. Jensen (1986) specifically suggests that a firm can reduce its agency
costs associated with excess cash by paying out dividends to shareholders or
increasing debt and interest payments to creditors.

Brav et al. (2006) find that the majority of activist hedge funds resemble
value investors, i.e. they target companies which they believe are undervalued.
They also find that the majority of hedge fund activism tends to fall into the
second of Klein and Zur’s two categories, i.e. they target general changes (e.g.,
payout policy, excess diversification), rather than firm-specific issues (e.g.,
operational difficulty, sales slump) (Brav et al., 2006) and quite often they succeed
with their plans, achieving, on average, 7%-10% abnormal return (Brav et al.,2006;
Klein et al., 2006; Boyson et al., 2007).

This means that in theory at least hedge funds are capable of improving a
firm’s performance, and that this would lead to higher share prices of the target
firm. However, there’s lack of evidence that hedge funds are achieving this in

16
practice. While there is evidence that hedge funds are associated with abnormal
returns of the shares, underlying performance of these firms isn’t really improving
as theory would expect. Brav et al. (2006) find that in two-thirds of all cases
activist hedge funds are successful in attaining their activist objectives (as stated in
their 13D filings) and they also find that hedge fund activism is associated with in
improvement in return (ROE) in the target firm. However, they find this
association to be weak and can’t confirm causality of the association. Zur et al.
(2006) can’t even find a slight improvement in the accounting performance of the
target firms. On the contrary they even find a decline in performance as measured
in ROE, ROA and EPS in the year after the activism. There is therefore little to no
evidence that hedge funds actually do improve target firm’s performance. Yet,
many studies do find that hedge funds activism is associated with a 7% to 10%
abnormal return of the target’s shares. These are two contravening facts which are
hard to reconcile. There must be another reason why hedge fund activism leads to
significant abnormal return. In fact, there are a couple of other factors which can
help explain these findings.

The first such factor is risk. As pointed out earlier investors demand a risk
premium for their investments and accordingly fundamental valuation methods
incorporate risk into the discount rate. Studies by Brav et al. and Zur et al. have
only measured the change in the firm’s performance such as ROE but they haven’t
considered risk. An increase of the share price could be explained by lower risk.
Reduction of agency cost, divestments, redirections of investments – all factors
which their studies founds that hedge funds were able to achieve – can all be
linked to potentially lower overall risk of the firm. For example divestments of
risky assets or risky operations would also decrease the overall business risk of the
firm. Reduced agency cost can be linked directly to better decision making which
can also result in lower overall risk. Maintaining the same ROE and the same
growth while lowering the risk (and thus the discount rate) would result in a
higher share price.
I don’t have any data to support this theory but at least it gives one feasible
explanation for the above discovered discrepancy.

Yet, there are two more factors to consider. Secondly, it has been shown that
hedge funds are responsible for up to 50% of all trade at the world’s major stock

17
exchanges (Braun, 2007; Schiller, 2006; Atzler 2005b; Campos, 2005). How trade
volumes increased over time can best be illustrated by a few examples. In 1960, the
average holding period for shares of a publicly listed company in the U.S. was
seven years. By 1992 the average holding period had shrunk to two years and by
2006 was down to only seven months (Odland, 2006). In other words, the average
annual share turnover for shares listed at the NYSE was:

12% in 1960
73% in 1987
86% in 1999
87% in 2005

(Allaire and Firsirotu, 2007)

NASDAQ figures are even higher, for example the shares of Amazon.com
turned over every seven days (Bratton, 2006). To a large extend these high levels
of turnover are attributed to hedge funds. Such increases in equity trade levels
certainly have a positive influence on the liquidity of the market, but there is also a
downside. Schiller (2006) found evidence that frequent trading caused by hedge
funds causes wild price fluctuations. There are reported cases of shares falling by
more than 30% in a single week after hedge funds had gone after the company.

Through extensive use of short positions or options hedge funds are

powerful enough to put share prices under upward or downward pressure.
Unfortunately, while long positions exceeding certain thresholds must be reported
and are thus made publicly known, trades of options or short positions by hedge
funds mostly take place in secret. Therefore no data for analysis is available and
the exact extend to which hedge funds can influence share prices through such
tactics is hard to estimate.

Yet, there’s also the third additional factor through which hedge funds could
possibly influence share prices: Psychology. As already discussed, all fundamental
evaluation methods are forward looking and thus depending on expectations.
These expectations are all assumptions and no investor or analyst can be certain
that his assumptions are correct. If an investor sees that others are willing to pay a
higher price for a stock, than that investor may be inclined to review and “adjust”
his own assumptions which may then lead him to evaluate the share at a higher
price. Shiller (2000) concluded that “People are prodded into the market, for example, by

18
the constant suggestion of 'the moral superiority of those who invested well' and the ego-
diminishing envy stirred by hearing that others have earned more in the market than they
have in salary.” In other words, self-doubts and uncertainty paired with fear that
one’s own assumptions could be wrong and could be resulting a financial loss or
foregone gains lead to herd behaviour. Kiev (2002) simply boils it down to the fact
that staying objective is difficult and that investors are “consumed with anxiety, self-
doubt, and frustration”.

Hedge funds could use this to their advantage by luring other investors into
thinking that they know something which others do not know. Greed and self-
doubt and anxiety would lead not all but some investors to believe that they are
loosing out on a profitable opportunity, consequently they will buy shares as a
result of which the share price rises. A very nice illustration of such anxiety is a
very recent example from the German stock market where shares in Deutsche Post
AG climbed 2.4 percent merely based on a rumour that a hedge fund might be
building up a stake in Deutsche Post AG. According to Reuters (2007) traders
stated that “Deutsche Post is jumping on rumours that TCI has already bought 3 percent
of the company via the market” and “Obviously something is really cooking there. There
are big two institutions in the U.S. that have been buying in the past few weeks, I don't
know what their intentions are”. Whether the underlying motivation of the hedge
fund is to use the psychological factor to lift up the share price and achieve a quick
2.4 percent profit or if the hedge fund actually is interested in a long term
investment is hard to say but at the same time it is irrelevant. The fact that the
mere rumour of a hedge fund investing is sufficient to increase the share price is
proof that psychological factors play a considerable role and hedge fund could use
this to their advantage.

So far I have presented evidence based on research from the U.S. that activist
hedge funds are able to generate positive abnormal returns in target firms. I have
also shown that the same studies find little to no evidence that these abnormal
returns are related to real performance improvements of the firms. Finally, I have
provided theories that reconcile the above discrepancy, i.e. I have also outlined

19
how hedge funds are theoretically able to boost share prices without improving
the target firm’s performance.

The final part of my research looks at historic market data to give real
quantitative evidence of the influence of hedge funds on share prices. Since
extensive research was already carried out for the U.S. market I have focused on
the German market, which in many ways differs from the U.S. especially with
regards to shareholder value and corporate governance, both of which are
strongly linked to shareholder activism.

Regarding the quantitative analysis, there are some fundamental challenges

to cope with. The first such challenge is that there is no clear definition of how
hedge funds are defined. I have also already referred to the definitions made by
Lake (2003) and Brav et al. (2006) and both give a correct but broad definition.
There is, therefore, no clear definition of what a hedge fund is, and, since hedge
funds aren’t regulated and, thus, aren’t obliged to report their dealings (with some
exceptions, such as Schedule 13D filings) there also is no central database about
hedge funds. A widely used and well renowned data source on hedge funds was
the TASS database (formerly known as the CSFB/Tremont database), ran by
Tremont Capital Management Inc. Allaire et al. (2007), Boyson et al. (2007),
Clifford (2007), Brav et al. (2006) and Chany et al. (2005) all used TASS as a prime
source for their research. Unfortunately Tremont has sold the database to Lipper
and the database is no longer publicly available. Regardless of its unavailability
Brav et al. (2006) have found that only 20-25% of the hedge funds which they had
found manually were actually listed in the TASS database and this finding makes
TASS an incomplete data source anyway. They attribute their finding to the fact
that TASS was using self-reported data from hedge funds and not all hedge funds
report themselves. This once again highlights the downside of lack of regulation
and the difficulty to obtain reliable and comprehensive data for research.

All of the above researchers have also relied on the Security Exchange
Commission’s (SEC) Edgar database which holds all Schedule 13D filings.
Although hedge funds are largely unregulated, section 13D of the Exchange Act of
1934 requires anyone who acquires more than five percent of a public company’s

20
shares to notify the SEC within ten days of crossing the five percent threshold,
resulting in a Schedule 13D filing2. With regards to this Act, hedge funds are
treated like any other investor and are thus equally required to file such disclosure
document which makes the Edgar database a valuable source of data.

In Germany both a similar rule and a similar database exist. Similar to

section 13D of the Exchange Act, §21 of the German Securities Trade Act
(Wertpapier Handelsgesetz, WpHG) requires anyone who crosses a 3%, 5%, 10%,
15%, 20%,25%, 30%, 50% or 70% threshold (in either direction) to notify the
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) – the German equivalent
of the SEC – within four working days. The BaFin stores such filings in a publicly
available database3, similar to the Edgar database.

However, unlike the Edgar database which keeps all filings, the German
database run by the BaFin only lists current ownership and filings related to them.
This means, it does not keep filings where, for example, a fund exceeds the 3%
threshold but later drops below it again. Once an investor drops below the 3%
threshold, old filings are deleted and no further record will be found in the
database. Since the BaFin only keeps records of current ownership structures,
historic findings are not available, which in the case of hedge funds who trade
frequently, is a considerable downside.

Given the lack of a central data source on hedge funds I used phased
approach to gather the relevant data.

Phase one was primarily aimed at compiling a list of hedge funds,

particularly those who are known as activist funds and those who trade on the
German market.

I used four source of information to compile such a list. First, I used the
Thomson One Banker database which includes a deals section. The deals section
list transactions where one institution bought blocks of shares of another
company. I search the deals database for transactions where the target was a
German company and the buyer was classified with any of the following industry

2 This 5% threshold is the reason why Klein et al. refer to a 5% stake in their definition of
hedge fund activism
3 Available at: http://www.bafin.de/database/AnteileInfoWeb/

21
codes: SIC 6282, 6722, 6799, 7389; NAIC: 523910, 523920, VEIC: 9000, 9250,
9299.These industry codes cover financial institutions excluding retail banks. This
search already turned out some relevant deals as well as names of hedge funds
and their targets. Secondly I used the Factiva news database to search for news
relating to Germany (German and English language), including the words “hedge
fund”, “hedge fond” or “hedge-fond”. I noted down all news reports of hedge
funds buying, or intending to buy blocks or shares. I also recorded the names of
all reported hedge funds. Third I used various hedge fund related websites to
gather the names of the biggest, most active and known activist funds. Fourth: I
ran searches on the BaFin database using names of known targets and acquirers
which I had gathered from the previous three sources. The BaFin database would
give me current ownership structure which in some cases led to new names of
other hedge funds.

From all four sources together I was able to gather 400 names (including
synonyms) of hedge funds as well as 30 names of individual investors which own
or manage hedge funds. While this list isn’t exhaustive, it is very unlikely that any
major hedge fund that could have a significant influence on the market would be
left out from my list.

Phase two of the data gathering process was aimed at finding all relevant
German deals where any of these hedge funds or investors were involved. Again,
I turned to the Thomson One Banker database searching for any deals with
German targets where the buyer matched any of the 400 names. I also used the
Factiva news database to search for articles concerning Germany which mentioned
any of the 400 hedge fund names or any of the 30 individuals.

From that search I was able to generate a list of 46 relevant deals.

In phase three of the research I retrieved German market index data (DAX,
MDAX, SDAX, TecDAX) for the period from 1/1/2004 to 31/7/2007 from the
Datastream database. I also retrieved the share prices of all target companies
involved in those 46 deals for the same period. I then used the Osiris database to
generate lists of peer companies for each target (using the Osiris peer analysis
function) and for each peer retrieved share price information.

22
 The final data was a comprehensive list of the German market index, share
prices of all involved target companies as well as share prices for all peers
(industry groups) for each target.

Based on research from the U.S. market (Brav et al.,2006; Klein et al., 2006;
Boyson et al., 2007) which showed that activist hedge fund on average deliver
abnormal returns of 7%-10%, the hypothesis for the German market was that
hedge funds would have a similar impact on German share prices.

If hedge funds had a positive influence on share prices then the positive
impact should occur near to the time of the investment (day 0) and should not
reverse thereafter. The data that I used was based on news reports or filings in the
Thomson One Banker database or in the BaFin database. In all cases I assumed
that the deal was not reported on the same day that it took place. The BaFin
requires deals crossing a threshold to be reported within 4 days. At the same time
information about the (planned) deal could have leaked to the market several days
before the deal actually took place. To reflect the delay in reporting and possible
leakage, I have used day0 minus 10 days (T-10) as the reference point for share
price performance. I consider T-10 as the time at which the target share price is
free from influence from the hedge fund deal.

In order to measure share performance, and to validate if target companies’

shares outperform the market, I have used a [-10,+30] day interval around day 0
(reported date of the deal). I compare the target share price [-10,+30] buy-and-hold
performance against the market index buy-and-hold performance (indexes used
are DAX, MDAX, SDAX and TecDAX) as well as against peer industry buy-and-
hold performance for the same perdiod. If hedge funds do have a positive
influence on share price performance than the target stocks should outperform the
market and their peers over the [-10,+30] period.

For control purposes I also looked at alternative time intervals [-30,+30],

[-10,+60] and [-100,+100] to control for any unusual events. As Kahan and Rock
(2006) point out, hedge funds are generally regarded as very short term investors
and their short investment horizons are an issue of controversy. This is mainly
because critics claim that hedge funds short-termism leads to short-term gains
which come at the expense of real long-term shareholder value. If this was really

23
the case than I would expect to see that any abnormal return that hedge funds
generate upon their engagement would reverse shortly after. There would be a
short-term increase in the share price but as other investors realize that there really
is no improvement to the underlying fundamentals, the share price should return
back to its original state. By applying a wider timer interval such as [-10,+60] and
[-100,+100] I can filter out such effects. If share outperform in the [-10,+30] interval
but perform average over a [-100,+100] interval this would be a strong indicator
for only short-term improvement.

The hypothesis of my research is that similar to the U.S. also in Germany

hedge funds are associated with positive abnormal returns of target firm’s shares.
Since other research has shown that, unlike common believe, hedge funds are not
short term investors (Bratton and Williams, 2006), my hypothesis is that abnormal
returns of shares associated with hedge funds are not reversed in subsequent
periods.

Proof of this hypothesis would be linked to quantitative analysis showing

significant (95% confidence level) abnormal returns of target firm’s shares over a
[-10, +30] as well as a [-10, +60] interval. The [-10, +30] interval is most relevant to
identify abnormal returns after hedge fund activity become publicly known.

If an abnormal return over the [-10, +60] interval is lower than over the
[-10,+30] period then that is an indicator that the abnormal return is short-term
only and not based on real fundamental improvement.

Finally, an abnormal return over the [-10, +30] interval without any
abnormal return over a [-30,+30] period would indicate that the target firm’s share
took a dip before the hedge fund invested and that the hedge fund is only a free
rider exploiting the situation.

Why a significant abnormal return over the [-10,+30] period alone does not
sufficiently prove my hypothesis is best illustrated with the three below diagrams.
Only the first diagram shows a real share price improvement attributable to the
hedge fund. The other two examples show short-term improvement only and the
free rider example where there is an increase in the share price but not caused by

24
the hedge fund. Rather, the hedge fund is acting opportunistically, speculating
that after a dip the share price will recover.

115

110

105
Hedge Fund
100
Markt
95

90
-90 -60 -30 0 +30 +60 +90

Figure 2 - Real performance improvement

A real improvement to the underlying fundamentals of a share would result

in a rising share price without subsequent reversal. The improvement is resulting
in an above average rise and thereafter the share performance “normally”. This is
shown in Figure 2 above.

115

110

105
Hedge Fund
100
Markt
95

90
-90 -60 -30 0 +30 +60 +90

Figure 3 - Short-term speculative spike

If the share price increase is only short-term, meaning there is no real change
to the firm’s performance then the initial jump in the share price is expected to
reverse in a subsequent period. This is shown in Figure 3 above.

25
 110

105

100

95 Hedge Fund
90 Markt

85

80
-90 -60 -30 0 +30 +60 +90

Figure 4 - Free rider

Lastly, not all share price movements are triggered by the activist hedge
fund. In fact, most share price changes have other reasons. It might therefore be
likely that a share performs above the market over the [-10, +30] period but only
because there was a short-term downwards dip which reversed shortly after.
Should a hedge fund buy during that dip, then the analysis would show a positive
abnormal return, however, this is not causally linked to the hedge fund. Figure 4
above is an example and a visual analysis of the share price performance as well
as referring to a longer term interval [-30, +60] can help identify and isolate such
cases.

My analysis of 46 occasions of hedge fund activism shows a result which is

utterly different from those in the U.S. Shares of target firms outperform the
market index only by 2.2% on average (buy-and-hold return over the [-10, +30]
period). The median value for the same period is even only 1.3%. This
performance is statistically not significantly different from the market index at a
95% confidence level. During the whole observation period (01/2004 until
07/2007) the DAX index had an average 40 day (equivalent to the [-10, +30]
interval) return of 2.2% (median 2.8%) while the target firm’s shares over the [-10,
+30] period achieved 4.8% (mean) and 3.8% (median). However, the standard
error for the sample was 0.023 (or 2.3 percentage points) and the difference
therefore is not statistically significant.

Over longer periods [-10, +60] the target shares buy-and-hold return is
equivalent to the market (mean 0%, median 0.1%) and over the even longer

26
[-100,+100] period target shares even under perform against the market with
negative abnormal return of -0.1% (mean) and -6.2% median.

The hedge funds target share performance against industry peers equally is
not significantly different. Abnormal returns are only 1.3% (mean) and negative -
0.5% (median) over the [-10, +30] interval with abnormal returns ranging from
negative -2.6% to 1.5% over the longer intervals.

The overall results are presented in Table 1 (abnormal return against market
index) and Table 2 (abnormal return against peer group) below.

(-10,30) (-30,30) (-10,60) (-100,100)

Average 2.2% 2.6% 0.0% -0.1%
Median 1.3% 1.0% 0.1% -6.2%
25th percentile -5.5% -5.6% -7.3% -13.2%
50th percentile 1.3% 1.0% 0.1% -6.2%
75th percentile 7.1% 10.0% 9.2% 15.8%
Standard Error 0.023186 0.025416 0.028297 0.040973678
Table 1 - Abnormal return against market index

(-10,30) (-30,30) (-10,60) (-100,100)

Average 1.3% 1.6% -1.3% -2.6%
Median -0.5% 1.6% 1.5% -1.0%
25th percentile -6.5% -8.6% -10.9% -22.6%
50th percentile -0.5% 1.6% 1.5% -1.0%
75th percentile 7.0% 8.5% 8.9% 19.7%
Standard Error 0.02291 0.025014 0.02805 0.039742334
Table 2 - Abnormal returns against peer group

At the 75% percentile target firm’s shares perform well and significantly
outperform the market and peer group. Here I also want to highlight that
abnormal returns are increasing over longer periods. This is a strong indication
that while many times hedge funds fail, in same cases they actually do achieve to
deliver sustainable long term improvements to overall operating performance.
Figure 5 and Figure 6 show the share price for EM.TV AG and SGL Carbon AG
over a six months period around hedge fund activism. The three vertical lines
mark the start, middle and end of the [-10, +30] interval. The most left line marks
t-10, the middle one t-0 and the right one t+30. The two straight lines between the
-10 and +30 markers are the projected market and peer performance as projected
from t-10. If the share price is above these lines then the share is delivering

27
positive abnormal returns and if the share price is below these lines then it is
delivering negative abnormal returns.

Figures 5 and 6 are examples of hedge fund activism associated with

positive abnormal returns without reversal in subsequent periods.

3.5

2.5

Figure 5 – Successful activism: EM.TV AG

13

12

11

10

Figure 6 – Successful activism: SGL Carbon AG

Figure 7 below illustrates the opposite case where hedge fund activism
backfired and was ill perceived by the market as the result of which the share
price dropped substantially by 17%.

28
 24

22

20

18

16

14

Figure 7 – Failed activism example: KUKA AG

In chapter 3.4 on page 15pp. I have given the example of a rise of the share
price of Deutsche Post merely based on rumours that a hedge fund bought a 3%
stake. Figure 8 shows the share price performance around this date. This figure is
a wonderful example for two reasons. First, it correlates nicely to Figure 3 on page
25 and to the theory behind the graph which I presented earlier. There is a short
spike going up from € 22.85 on 24/4/2007 to € 25.63 on 27/4/2007. This spike is a
12% rise in just three days. Shortly thereafter the price falls back to €23.4. This is a
typical example for a speculative share prince increase which is not underlined by
any changes to the underlying fundamentals. Secondly, this graph also illustrates
that the sharp share price rise started a few days before day 0, the day of the
official announcement. This strongly indicates that information was leaked to the
market. Such leakage is the reason why for analysis I am using the [-10, +30]
interval instead of a [0, +30] interval. Using the latter would lead to wrong
conclusions as can be seen from the graph in Figure 8.

29
 27
26
25
24
23
22
21

Figure 8 - Short term spike: Deutsche Post AG

Similarly, Figure 9 correlates well to Figure 4 on page 26 which I used to

illustrate the free rider strategy. There’s a downward dip in the share price of
Medion AG upon which the hedge fund reacts by increasing its stake to 10%,
speculating that the share price would recover, which it did. While such case
would show up as a significant abnormal return over the [-10, +30] period, it is
highly unlikely that the hedge fund helped improving Medion’s performance. Yet,
this does not mean that the price increase is not related to the hedge funds action.
Its move to increase its stake in Medion to 10% could very well have triggered
other investors and analysts to review their valuations. Maybe in fact Medion was
undervalued, the hedge fund spotted this and other investors followed. The cause
and effect relationship in this case is hard to identify but it seems likely that there
is an association between the price increase and the hedge fund action.

14

13

12

11

10

Figure 9 - Free rider example: Medion AG

30
 The above example could be described as an event driven strategy; the
hedge fund responded to the temporary share price decline. Figure 10 is another
example of even driven strategy. In this example Rinol AG was in financial
distress. Around the date of hedge fund action two major events took place.
Firstly, there was a shareholder meeting at which shareholders approved the
presented turnaround strategy and secondly, banks granted additional loans to
Rinol AG. The share price increase is primarily attributable to the recovery of
Rinol, shareholders agreeing to the turnaround plan and banks granting
additional financing. The hedge fund was only a passive speculator in this case
(maybe having insider information).

Figure 10 - Event driven (distress) Example: Rinol AG

Another illustration of an event driven strategy is shown in Figure 11 below.

In this event Schering AG was a takeover candidate and bids by the acquirer were
already made (hence the sharp share price increase before the hedge fund action).
The involved hedge fund was speculating for an even higher bid by the acquirer
which in the end was successful but only marginally.

31
 99
89
79
69
59
49

Figure 11 - Merger arbitrage example: Schering AG

Finally, there are also cases where even active activism by a hedge fund has
virtually no impact at all on the share price. Figure 12 is such a case. Techem AG’s
share price was flat while the market and peers were growing at normal rates.
This can be explained by the fact that the share price had already gone up
significantly from around € 38 to € 56. While the hedge fund claimed that the
company was underperforming and that the share price needed to rise, the market
had a different view and the hedge fund activism was not successful.

59
54
49
44
39
34

Figure 12 - No market reaction: Techem AG

Only in 15 out of 46 cases (33%) there was a significant (>5%) positive abnormal
return over the [-10, +30] observation period. In 5 out of these 15 occurrences the
positive abnormal return was reversed in subsequent periods. Out of the 10
remaining cases for two the rise in the share price appears to be attributable to

32
external factors (e.g. relieve of the distress situation in the case of Rinol AG). This
means that there are only 8 out of 46 cases where hedge funds had a long lasting
positive influence on the target firm’s share price. Even for the 8 remaining cases,
there is no clear evidence that the hedge funds are the source of the share price
increase. It is equally possible that hedge funds were just stock picking the right
shares at that time (8 out of 46 could be pure luck).

The mean abnormal return of the whole sample is only 2.2% measured
against the market index and 1.3% when measured against peer groups, and both
values are not significantly different from 0% at a 95% confidence level. Overall,
there is therefore little to no evidence that hedge funds are a source for share price
increases or real improvements of the target firm’s performance (which should be
reflected in the share price) as I had originally anticipated.

My findings give no proof of lasting share price improvements attributable

to hedge funds. These results imply that, unlike in the U.S., hedge funds in
Germany are unable to facilitate any kind of change that would result in real
improvements of underlying fundamental performance criteria which would
increase the value of the target firm. My findings also differ from the findings of
Brav et al. (2006), Klein et al. (2006) and Boyson et al. (2007) in the U.S. who all
found evidence of positive abnormal return attributable to activist hedge funds. A
simple explanation for this would be that my sample size was much smaller than
those of the U.S. studies, but I don’t believe that this is the real reason. It seems
more likely that market differences are the real reason behind the different
findings.

Roddy Campbell in his book “European event and arbitrage investing”

stipulated several laws of which the first law reads: “arbitrage has never worked in
countries that have never been ruled by Britain” (Campbell, 2003). He explicitly
includes most European countries, including Germany in the list of countries
never ruled by Britain. The truth behind this is indeed that financial markets in
Britain and in the U.S. have a different tradition than for example in Germany or
in Japan. Corporate funding in the U.S. has always been based on equity whereas
debt was (and in many cases still is) the main source of funding for firms in

33
Germany (Brealey, Myers, Allen, 2006). Consequently, the U.S. has a much
stronger sense for corporate governance and shareholder value and even
shareholder activism has a long history. In contrast, in Germany managers,
especially in smaller companies, are much less used to the idea of shareholder
value and stakeholder value is much more common. This can be attributed to the
fact that Germany puts a much stronger emphasis on co-determination which
weakens the influence that shareholders have. Shareholder activism is therefore
more difficult and rather uncommon as the shareholders are only one part of a
long list of stakeholders. The first obstacle for activist hedge funds is therefore to
get the firm’s management to listen. There are prominent examples in Germany
where hedge funds were successful (e.g. Deutsche Börse) but there are also other
prominent cases were the target firm’s management just ignored whatever the
hedge funds were demanding (e.g. CeWe). Even if the firm’s management buys in
to the hedge funds ideas, this doesn’t mean that the rest of the market will
appreciate such involvement. Ever since Franz Müntefering, former German
Federal Minister of Labour and Social Affairs called hedge funds locusts, are
investors scared that a hedge funds involvement could actually lead to poorer
long-term performance. Such anxiety can lead scared investors to sell their shares
upon receiving information that a hedge fund is planning to exert influence on a
firm. While I don’t have evidence for my theory, I do believe that differences in
the financial market and in corporate governance are the reason why hedge funds
in Germany are less successful than in the U.S. in regards to increasing target
firm’s share prices.

My research has primarily focused at long-term improvements of share

prices and I have only briefly touched upon the short term effects. I have given an
example of Deutsche Post AG were there was a very short-term spike in the price
of the share but I could only do so because information about this event was in the
news. I am certain that there are many cases were hedge funds are manipulating
share prices by small percentages over a very short period of time. Jim Cramer, a
former hedge fund manager has recently hinted to such practices in an interview
with TheStreet.com (New York Times, 2007), indicating that hedge funds could
manipulate share prices to go up or down as needed. The SEC has also recently
announced that it finds a large amount of suspicious trading, indicating insider

34
deals (SEC, 2006). John Coffee believes that hedge funds are the reason behind the
increase in insider trading. He states that “hedge funds are unregulated, and their
managers are not monitored as closely by compliance officers and counsel […]. Because
they trade in larger increments than more diversified institutional investors, they will pay
more for useful tips”. (Bingham McCutchen, 2006). While both sources are referring
to the U.S. market I suspect that also in Germany hedge funds are actively
involved in such manipulation. I dare to say that in some cases (e.g. Deutsche Post
AG), hedge funds pretend to be activist funds to make the market believe that
they will add value to the target’s share in order to benefit from a short-term price
increase. By the time the share price has fallen again, the hedge fund will have
sold its stake already, taking with it a small but profitable 1% or 2% gain.
Unfortunately, it is very hard to prove such suspicions due to the fact that hedge
funds are not regulated. As long as their stake remains below the 3% threshold at
which they would have to report their stake to the BaFin, hedge funds can trade
anonymously and only go public if it suits their need, e.g. they can buy a 2.8%
stake, announce this fact, wait for the price to rise and then sell their stake in
silence. Since hedge funds don’t have to report their dealings it is almost
impossible to get the necessary data to substantiate suspicions such as the one that
I have raised.

However, overall I can conclude that hedge funds in Germany have a

weaker position than they have in the U.S. Their impact on the market is felt much
less and their ability to drive corporate change is limited by German
management’s stance on shareholder value and corporate governance. And while
there are a few well publicized hedge fund related events, most hedge fund deals
in Germany go unnoticed and seem to be market neutral.

35
Allaire, Yvan and Firsirotu, Mihaela E., 2007, “Hedge Funds as Activist Shareholders:
Passing Phenomenon or Grave-Diggers of Public Corporations?‖. Available at SSRN:
http://ssrn.com/abstract=961828

Atzler, Elisabeth, 2005a, “Hedge-Fonds fordern Unternehmen heraus”, Financial

Times Deutschland, 5 September, 2005

Atzler, Elisabeth,2005b, “Hedge-Fonds machen Tempo an den Börsen“, Financial

Times Deutschland, 8 September, 2005

Barber, Brad M., 2006, “Monitoring the Monitor: Evaluating CalPERS' Shareholder
Activism”, Working Paper.

Bingham McCutchen LLP, 2006, “Hedge Funds Newsletter”, Bingham McCutchen

LLP, Fall 2006

Boyson, Nicole M. and Mooradian, Robert M., 2007, “Hedge Funds as Shareholder
Activists from 1994-2005‖. Available at SSRN: http://ssrn.com/abstract=992739

Bratton, William W., 2006, “Hedge Funds and Governance Targets”, Available at
SSRN: http://ssrn.com/abstract=928689

Braun, Christian, 2007, “Smoke, mirrors and Hedge Funds”, Ethical Corporation, July
7, 2007, http://www.ethicalcorp.com/content.asp?ContentID=5231

Brav, Alon, Jiang, Wei, Partnoy, Frank and Thomas, Randall S., 2006, “Hedge Fund
Activism, Corporate Governance, and Firm Performance‖. ECGI - Finance Working
Paper No. 139/2006 Available at SSRN: http://ssrn.com/abstract=948907

Brealey, Richard A., Myers, Stewart C., Allen, Franklin, 2006, “Corporate Finance”,
8th Edition, McGraw-Hill

Briggs, Thomas W., 2007, “Corporate Governance and the New Hedge Fund
Activism: An Empirical Analysis”. Journal of Corporation Law, Vol. 32, No. 4, 2007
Available at SSRN: http://ssrn.com/abstract=911072

Campbell, Roddy, 2003, “European event and arbitrage investing”, as part of

“Evaluating and Implementing Hedge Fund Strategies”, 3rd Edition, Euromoney Books

Campos, Roel C., SEC Commissioner, Speech to the Managed Funds Association,
July 12, 2005

Chany, Nicholas T., Getmansky, Mila, Haas, Shane M. and Lo, Andrew W., 2005,
“Systemic Risk and Hedge Funds‖. MIT Sloan Research Paper No. 4535-05 Available
at SSRN: http://ssrn.com/abstract=671443

Clifford, Christopher, 2006, “Value Creation or Destruction? Hedge Funds as

Shareholder Activists‖, Available at SSRN: http://ssrn.com/abstract=971018

Cox, Christoper, 2006, Testimony concerning the regulation of hedge funds (before
the U.S. Senate Committee on Banking, Housing and Urban Affairs), July 25 2006,
Available at: http://www.sec.gov/news/testimony/2006/ts072506cc.htm

36
Dougherty, Carter, 2007, “Economic power to study growing influence of hedge
funds”, International Herald Tribune, February 10, 2007, available at:
http://www.iht.com/articles/2007/02/10/europe/web.0210G7.php

Financial Times, 2005, “Hedge funds hold a quarter of Germany's blue-chips”,

Financial Times, 2 September, 2005

Financial Times Deutschland, 2005, “Hedge-Fonds machen Tempo an den

Börsen“, Financial Times Deutschland, 8 September, 2005

Fisher, Kenneth L., Statman, Meir, 2002, “Blowing Bubbles”, The Journal of
Psychology and Financial Markets, 2002, Vol. 3, No. 1, Pages 53-65

Gabelli, Mario J., 2007, “The History of Hedge Funds – The Millionaire’s Club”,
GAMCO Investors Inc., retrieved on August 1, 2007. Available at:
http://www.gabelli.com/news/mario-hedge_102500.html

Garbaravicius, Thomas, Dierick, Frank, 2005, “Hedge Funds and Their Implications
for Financial Stability”, European Central Bank, Occasional Paper Series, No. 34,
August 2005

Gillan, Stuart L. and Starks, Laura T., 2007, “The Evolution of Shareholder Activism in
the United States”. Available at SSRN: http://ssrn.com/abstract=959670

Goetzmann, William N., and Stephen A. Ross, 2000, “Hedge funds: Theory and
performance”, Working Paper, Yale University and Massachusetts Institute of
Technology

Hu, Henry T.C. and Black, Bernard S., 2007, “Hedge Funds, Insiders, and the
Decoupling of Economic and Voting Ownership: Empty Voting and Hidden
(Morphable) Ownership‖. Journal of Corporate Finance, vol. 13, pp. 343-367, 2007
Available at SSRN: http://ssrn.com/abstract=874098

Hu, Henry T.C., and Black, Bernard, 2006, “Hedge funds, insiders, and empty voting:
Decoupling of economic and voting ownership in public companies”, Working paper,
University of Texas Law School

International Financial Law Review, 2005, “Germany to reward active

shareholders”, International Financial Law Review; Nov2005, Vol. 24 Issue 11, p10-
10, 2/3p

Jensen, Michael C., 1986, Agency costs of free cash flow, corporate finance, and
takeovers, “American Economic Association Papers and Proceedings‖, May 1986, pp.
323-329.

Kahan, Marcel and Edward Rock, 2006, “Hedge Funds in Corporate Governance and
Corporate Control”, New York University working paper.

Karpoff, Jonathan M., 2001, “The Impact of Shareholder Activism on Target Companies:
A Survey of Empirical Findings”, Working Paper.

Kahn, Charles, and Andrew Winton, 1998, “Ownership Structure, Speculation,

and Shareholder Intervention”, Journal of Finance 53, 99-129.

37
Klein, April and Zur, Emanuel, 2006, “Hedge Fund Activism”, AAA 2007 Financial
Accounting & Reporting Section (FARS) Meeting Paper Available at SSRN:
http://ssrn.com/abstract=913362

Kiev, A., 2002, “The psychology of risk mastering market uncertainty”, New York, NY,
John Wiley & Sons

Lake, Ronald A., 2003, “Evaluating and Implementing Hedge Fund Strategies”, 3rd
Edition, Euromoney Books

McWhinney, Jim, 2005, “A Brief History of the Hedge Fund”, Investopedia,

November 8, 2005, Available at
http://www.investopedia.com/articles/mutualfund/05/HedgeFundHist.asp

New York Times, 2007, “Jim Cramer’s Guide to Market Manipulation”, DealBook,
New York Times, March 20, 2007, available at:
http://dealbook.blogs.nytimes.com/2007/03/20/cramer-market-manipulator/

Odland, Steve, 2006, Keynote address to the National Association of Corporate

Directors, October 16 2006, available at:
http://www.businessroundtable.org/taskForces/taskforce/document.aspx?qs=7
085BF159F949514481138A77EC1851159169FEB56A36B9AE

Reuters, 2007, “Deutsche Post up on talk of TCI stake build”, Stock New Europe,
Reuters, June 14, 2007

Rose-Smith, Imogen, 2006, “The Hedge Fund 100”, Institutional Investor’s Alpha,
Alpha Research Centre, June 2006

Schiller, Ben, 2006, “Hedge funds and private equity - Trading down corporate
responsibility”, Ethical Corporation, November 14, 2006.
http://www.ethicalcorp.com/content.asp?ContentID=4681

SEC, 2006, Testimony of Linda Chatman Thomson, Director Division of

Enforcement U.S. Securities and Exchange Commission, SEC, December 5, 2006,
available at: http://www.sec.gov/news/testimony/2006/ts120506lct.pdf

Shiller, Robert J., 2000, “Irrational Exuberance”, Princeton, N.J.: Princeton

University Press, 2000

Süddeutsche Zeitung, 2007, “Finanzinvestoren”, Süddeutsche Zeitung, 29 June, 2007

38
Target Hedge Fund Day 0 Comments
10tacle Avenue Capital 13/10/2006 stake increased to above 8%
Balda Guy Wyser-Pratte 17/01/2007 increased stake to 5.39%
Bertrandt Absolute Capital Management 28/12/2005 stake REDUCED from 6.5% to 3.7%
BHW Absolute Capital Management 23/12/2005 3% stake
Borussia Dortmund Och-Ziff 27/06/2006 7.56%
has 9%; demands extraordinary
CeWe MarCap (M2 Capital) 31/01/2007 dividend
also Lansdowne; merger arbitrage
Commerzbank Tosca Fund 03/08/2005 (hoping for takeover)
pressure to make changes and
Deutsche Börse Atticus 24/02/2007 increase dividend
Deutsche Börse TCI 09/05/2006 10% stake
Deutsche Post TCI 27/04/2007 speculation that TCI would invest
Deutsche Telekom Laxey 03/11/2006 Activism starts here
Deutsche Telekom Blackstone 24/04/2006 4,5%
Drillisch Montrica 09/03/2007 6.17%
EM.TV Centaurus 11/10/2004 5.22% stake reported
EM.TV MarCap (M2 Capital) 09/06/2007 3% stake
Evotec Absolute Capital Management 02/07/2007 3.037%
Hermes (holding 5.2%) pushing for
Freenet Hermes 25/06/2007 divestment, support from ACM
bought 3% and announced planned
increase to 5% and expectation of
Freenet Absolute Capital Management 24/05/2007 6Euro dividend
Gerry Weber Absolute Capital Management 22/02/2007 3.3% stake
Heidelberger Druck Centaurus 04/07/2007 5.13%
Hugo Boss Carlyle and Permirar want to takeover
(Valentino) Carlyle 16/05/2007 Valentino
Karstadt Wellington Management Company 01/03/2007
KUKA (IWKA) Guy Wyser-Pratte 28/10/2003 buys 5% stake
KUKA (IWKA) Guy Wyser-Pratte 17/10/2005 stake increased to 7%
KUKA (IWKA) K Capital Partners 07/05/2005 5.29% stake
Medion Orbis 24/01/2005 5.5% stake
Medion Orbis 21/01/2006 stake increased to 10% (early January)
Mistral Media AG Absolute Capital Management 22/12/2006
Pixelpark AG Absolute Capital Management 29/03/2007
Praktiker Eton Park Capital Management 13/04/2006 stake 6.6%
second hedge fund to invest, stake
Praktiker T. Rowe Price 10/05/2006 5.24%
Praktiker Eton Park Capital Management 03/07/2006 stake REDUCED from 6.6% to 2.4%
Highbride plans to TAKE OVER Rinol
Rinol Highbride 10/08/2005 (who is in distress situation)
77 euro bid on march 13 2006, price
jump already before HF announcement
Schering Citadel 12/04/2006 due to bid, latest bid 86
K Capital and others have bought 15%
SGL Carbon K Capital Partners 19/05/2005 stake (total, all three)
SGL Carbon K Capital Partners 24/06/2005 stake REDUCED to 2.8%
TAG Tegernsee Absolute Capital Management 18/08/2006 stake 5%
TAG Tegernsee Taube Hodson Stonex 07/09/2006 11% stake

39
 stake increased to above 10% and to
Techem Elliot Associates 15/03/2007 15% one week later
first report 3 Jan; further activism mid
March 2007 and June 26 2007;
quadrupled dividend announced Feb
Techem Elliot Associates 03/01/2007 2007
TUI Absolute Capital Management 12/03/2007 3% over last 2-3 months
various hedge funds SHOWING
TUI various 13/08/2004 INTEREST, not actually buying
Vivacon Absolute Capital Management 02/03/2007 3% stake since February 21

40
41
 15
14.5 10tacle
14
13.5
13
12.5
12
11.5
11
10.5
10

12
11
Balda
10
9
8
7
6
5
4

14
Bertrandt
13
12
11
10
9
8
7

42
2.7 Borussia Dortmund
2.5

2.3

2.1

1.9

1.7

49 CeWe
44

39

34

29

24 Commerzbank
22

20

18

16

14

43
67 Deutsche Börse
62

57

52

47

42

95 DeutscheBörse (2)
90
85
80
75
70
65
60
55

28
27
Deutsche Post
26
25
24
23
22
21
20
19

44
 16
Deutsche Telekom
15

14

13

12

11

10

16
15.5 Deutsche Telekom (2)
15
14.5
14
13.5
13
12.5
12
11.5
11

81
DIS
76
71
66
61
56
51
46
41

45
 10
9.5 Drillisch
9
8.5
8
7.5
7
6.5
6
5.5
5

4
3.8 EM.TV
3.6
3.4
3.2
3
2.8
2.6
2.4
2.2
2

5
4.9 EM.TV (2)
4.8
4.7
4.6
4.5
4.4
4.3
4.2
4.1
4

46
27 Freenet
25

23

21

19

17

15

27 Freenet (2)
25

23

21

19

17

15

24 Gerry Weber
22

20

18

16

14

47
59 Hugo Boss
54

49

44

39

34

24
23 KuKa
22
21
20
19
18
17
16
15
14

25
24 KuKa (2)
23
22
21
20
19
18
17
16
15

48
 31 Karstadt
29
27
25
23
21
19
17

19
18
Medion
17
16
15
14
13
12
11
10

14
13.5 Medion (2)
13
12.5
12
11.5
11
10.5
10
9.5
9

49
9
8
Nordex
7
6
5
4
3
2
1

28 Praktiker
26

24

22

20

18

28 Praktiker (2)
26

24

22

20

18

50
29
Praktiker (3)
27
25
23
21
19
17
15

9
8.5 Rinol
8
7.5
7
6.5
6
5.5
5
4.5
4

99 Schering
89

79

69

59

49

51
 13
12.5 SGL
12
11.5
11
10.5
10
9.5
9
8.5
8

14
SGL (2)
13

12

11

10

11
10.5
TAG
10
9.5
9
8.5
8
7.5
7

52
 11
10.5
TAG (2)
10
9.5
9
8.5
8
7.5
7

59
Techem
54

49

44

39

34

62 Techem (2)
60
58
56
54
52
50
48
46

53
18
TUI
17
16
15
14
13
12
11

24
23 TUI (2)
22
21
20
19
18
17
16
15
14

34
32
Vivacon
30
28
26
24
22
20
18

54
30 Arquana
28
26
24
22
20
18
16

6
Mistral
5.5

4.5

3.5

2
1.9 Pixelpark
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1

55
 1.5
WCM
1.4
1.3
1.2
1.1
1
0.9
0.8

18
17.5 BHW
17
16.5
16
15.5
15
14.5
14
13.5
13

56
Relevant hedge funds and search terms used for the database research:

3I DEUTSCHLAND GMBH BC Partner GmbH

3i Group Investments
3i Group
Aberdeen Asset Management Asia
Aberdeen Asset Management Co
Aberdeen Asset Management
Aberdeen Asset Managers Growth Capital Blackstone Capital Partners IV
Aberdeen Asset Managers Private Equity
Aberdeen High Income Trust
Aberdeen Murray Johnstone Private Equity Blackstone Group International
Aberdeen Preferred Income Trust
Aberdeen Preferred Securities
Aberdeen Private Investors
Aberdeen Private Investors -Investment Management
Business
Aberdeen Property Investors AS
Aberdeen Property Investors Nordic AB
Aberdeen Property Investors Services
Aberdeen Property Investors UK
Aberdeen Real Estate Fund Finland
Aberdeen Trust Holdings
Absolute Capital Management
Absolute Capital Management Holdings
Accipiter Capital Management
Affinity Equity Partners
Affinity Equity Partners
AHL
AIM Trimark
Angelo Gordon
Angelo Gordon & Co
Antilooppi Oy
Appaloosa Management
Appaloosa Mgmt
AQR Capital
Asset Value Investors
Atticus Capital
Atticus Capital
Atticus Global Fund
Atticus Investments Assets Inc
Atticus Management
Atticus Mauritius
August Broetje GmbH
Avenue Capital
Avenue Capital Group
Barclays Global Investors
Barington Capital Group
BC European Capital
BC Partners Holding
BC Partners
Bessent Capital
BIG-Heimbau AG
Blackstone
Blackstone Capital Partners
Blackstone Capital Partners V
Blackstone Group International
Blackstone Group
Blue Ridge Capital
Blue Wave
BlueBay Asset Management
BlueCrest Capital
BlueMountain
Boussard & Gavaudan
Boussard & Gavaudan Gestion
Boussard & Gavaudan Holding
BP Capital Management
Bradesco Asset Management a
Brevan Howard
Bridgewater
Bridgewater Associates Inc.
Brummer & Partners
Buchanan Capital Holding AG
Buchanan Capital Management
Buchanan Capital Partners GmbH
Bulldog Investors
Bulldog Investors General Partnership
Burton Capital BV
Burton Capital Managament
Burton Capital Management / BCM
Callahan Associates International
Callahan Associates Intl
CambridgePlace Investment Management
Cannell Capital
Cantillion Capital Management
Cantillon
Capital Growth Financial
Capital Growth Fund
Capital Growth Partners
Capital Management Advisors Group
Cardinal Value Equity Partners
Carl Icahn
Carlos Slim Helu

57
Carlyle Group Dubai Holding
Caxton Associates Edward Lampert
Celanese AG Egerton Capital
Celanese Europe Holding GmbH Elliot and Deka
Celanese Europe Holding GmbH & Co KG Elliott Associates
Celexa Group Elliott International
Centaurus Capital Elliott Management Corp
Centaurus Capital Enhanced Zero Trust
Centaurus Energy EQMC Fund
Cerberus Capital Equitilink elink
Cerberus Capital Management ESL Investments
Cerberus European Investments ESL Investments Inc
Cerberus Investment ESL Partners II
Cevian Capital ESL Partners
CeWe Color Holding AG Ethos Fund
CGA Insurance Brokers Eton Park
Chap-Cap Activist Partners Eton Park Capital Management
Chap-Cap Partners 2 Eurocastle Investment
Chapman Capital Everest Capital Advisors
Cheyne Capital Exel
Cheyne Capital Management Farallon
Children's Invest Fund Mgmt Farallon Associates
Children's Investment Fund Management Farallon Capital Institutional Partners II
Children's Investment Fund Mgmt Farallon Capital Institutional Partners III
Cholet Acquisitions Farallon Capital Institutional Partners
Citadel Farallon Capital Management
Citadel Investment Group Farallon Capital Management
Clarium Capital Farallon Capital Management Partners
CMP Acquisition Corp Farallon Capital Offshore Investors II
CMP Group Inc Farallon Capital Offshore Investors Inc
CMP Holdings Ferox Capital
CMP Investments Fortress
CMP Partners Fortress Deutschland GmbH
Coller Capital Fortress Investment Group
Convexity FrontPoint
Copper Arch Capital Fulcrum Asset Management
Costa Brava Partnership III, Gabelli Asset Management
CQS GAGFAH Immobilien-Management
Cyrus Capital Partners Gartmore
D.E. Shaw GBH Acquisition GmbH
David Jones Gerresheimer Group
DE Shaw Glenview Capital
Deutsche Annington Immobilien GLG Partners
Deutsche Asset Mgmt Grp Goldman Sachs Asset Management
Diamond Hill Focus Long-Short Fund Goodwood
Dillon Read Graham Investment Managers
Dividend Capital Trust Inc Grainger Trust
Dolphin Greenlight Capital
Dometic International AB Guy Wyser-Pratte
Drive Sarl Hao 63
Dubai Financial Harold Simmons

58
Hastings Funds Management Man Group
Heat Beteiligungs III GmbH Marcap Corp
Hennessee Group Marshall Wace
Hermitage Capital Corp Maverick Capital
Hermitage Capital Management Millennium Partners
HERMITAGE CAPITAL MANAGEMENT Moneywise Queensland Pty
HIE Ventures Montrica Investment Management
Highbridge Moore Capital
Highbridge Capital Murray Emerging Growth & Income Trust
Highbridge Capital Management Murray Japan Growth & Income
Highbridge Event Driven/ Relative Value Murray Johnstone Holdings
Highbridge International Murray Johnstone
Highfields Capital Murray Johnstone Private Equity
Highfields Capital GP Nakornthon Schroder Asset Management Co
Highfields Capital Management Northern Trust Corp
Highland Capital Corp Northern Venture Managers
Highland Capital Holding Corp Oaktree Capital Group,
Highland Capital Management Oaktree Capital Management
Highland Capital Partners Oaktree Capital Management.
HL Income & Growth Trust Och Ziff Capital
Icahn Partners Och-Ziff
Icahn Partners Master Fund Och-Ziff Capital Management Group
International Management Associates Och-Ziff Management Europe
Investor Group Octavian Advisors
Investor Group Omega Advisors
Investors Omega Advisors Inc
Investors Opportunity Partners
IXIS Capital Partners Orbis AG
Jabre Capital Partners Orbis Capital
Jana Partners Orbis Investment Management
JP Morgan Orbis Investment Management
JTR Management OSK Asia Securities
JWM Partners Ospraie Management
K Capital Partners Owl Creek Asset Management
K Capital Pty Pardus Capital Mgmt
Kailix Advisors Paulson & Co
KBC Alternative Investment Management Pembridge Capital Management
Kingdon Capital Pequot Capital
Kynikos Perry Capital
Lansdowne Partners Perry Capital Corp
Laxey Investment Trust Perry Capital Group
Laxey Partners Perry Corp
Legg Mason Pershing Square Capital Mgmt
Liberation Investment Group Pirate Capital
Liverpool Platinum Equity
Liverpool Partnership Polygon Investments
London Diversified Fund Management Primemodern
Lone Pine Prolific Financial Management
Lone Pine Capital PSAM
Longhirst Group Questor Partners Fund II
Magnetar RAB Capital

59
Red Kite Terra Firma Investments
Relational Investors Thames River Capital
Renaissance Technologies The Children’s Investment Fund
Richard Blum Themis Investment Management
Richards Longstaff Third Avenue Managment
Rowe Price Fleming International Inc Third Point
SAC Capital Third Point Partners
SAC Capital Advisors Tibbet & Britten Deutschland
Sandell Asset Management Tontine
Sandell Asset Management Corp Tosca Fund
Sandell Perkins Toscafund
Santa Monica Partners Touradji Capital
Scandinavian Property Development ASA Touradji Capital Management
Schultze Asset Mgmt TPG-Axon
Scottish National Trust Tracinda Corp
Shepherd Investments International Trafelet & Co
Silver Point Capital Trian Fund Management
Silver Point Capital Fund Investments Trian Group
SkyBridge Capital Tribeca
Sloane Robinson Tudor
Soros Fund Management Tudor Arbitrage Partners
Southeastern Asset Management Tudor Capital Partners
Stark International Tudor Capital Ventures II
Stark Trading Tudor Capital
Steel Partners Tudor Group Holdings
Steel Partners II Tudor Investment Corp
Steel Partners Turdor Investment Corp
Stewart Horejsi Undisclosed Danish Properties
SULO GmbH ValueAct Capital Management
SULO Group Vega Asset Management
SULO Nord-West GmbH & Co KG Viterra Energy Services AG
Sulo Ost GmbH & Co KG Viterra Sicherheit und Service GmbH
TCA Group VMS Value Management Services
TDC A/S Whitehall Street Fund
Techem AG WS Capital
Techem AG Energy Contracting Wyser-Pratte
Techem Energy Services GmbH York Capital
Terra Firma Capital Partners
Terra Firma Capital Partners
Terra Firma Capital Partners -Movie Houses

60
List of hedge fund managers and hedge fund investors which were used to
supplement the database search:

William Ackman
Jeffrey Altman
Richard Blum
Robert Burton
Robert Chapman
Steve Cohen
Michael Dell
Ric Dillon
Phillip Goldstein
Charles Gradante
Christopher Hohn
Stewart Horejsi
Tom Hudson
Carl Icahn
Kirk Kerkorian
Edward Lampert
Daniel Loeb
Donald T. Netter
Jim Mitarotonda
Nelson Peltz
Barry Rosenstein
Michael Roth
David Shaw
Harold Simmons
Scott Sipprelle
Carlos Slim Helu
Brian Stark
David Tepper
Ralph Whitworth
Guy Wyser-Pratte

61
Convertible Arbitrage: This strategy is identified by hedge investing in the
convertible securities of a company. A typical investment is to be long the
convertible bond and short the common stock of the same company.
Positions are designed to generate profits from the fixed income security as
well as the short sale of stock, while protecting principal from market
moves.
Dedicated Shortseller: Dedicated short sellers were once a robust category
of hedge funds before the long bull market rendered the strategy difficult
to implement. A new category, short biased, has emerged. The strategy is
to maintain net short as opposed to pure short exposure. Short biased
managers take short positions in mostly equities and derivatives. The short
bias of a manager's portfolio must be constantly greater than zero to be
classified in this category.
Emerging Markets: This strategy involves equity or fixed income investing
in emerging markets around the world. Because many emerging markets
do not allow short selling, nor offer viable futures or other derivative
products with which to hedge, emerging market investing often employs a
long-only strategy.
Equity Market Neutral: This investment strategy is designed to exploit
equity market inefficiencies and usually involves being simultaneously
long and short matched equity portfolios of the same size within a country.
Market neutral portfolios are designed to be either beta or currency
neutral, or both. Well-designed portfolios typically control for industry,
sector, market capitalization, and other exposures. Leverage is often
applied to enhance returns.
Event Driven: This strategy is defined as `special situations' investing
designed to capture price movement generated by a significant pending
corporate event such as a merger, corporate restructuring, liquidation,
bankruptcy or reorganization. There are three popular sub-categories in
event-driven strategies: risk (merger) arbitrage, distressed/high yield
securities, and Regulation D.
Fixed Income Arbitrage: The fixed income arbitrageur aims to profit from
price anomalies between related interest rate securities. Most managers
trade globally with a goal of generating steady returns with low volatility.
This category includes interest rate swap arbitrage, U.S. and non-U.S.
government bond arbitrage, forward yield curve arbitrage, and mortgage-
backed securities arbitrage. The mortgage-backed market is primarily U.S.-
based, over-the-counter and particularly complex.
Global Macro: Global macro managers carry long and short positions in
any of the world's major capital or derivative markets. These positions
reflect their views on overall market direction as influenced by major
economic trends and/or events. The portfolios of these funds can include
stocks, bonds, currencies, and commodities in the form of cash or

62
derivatives instruments. Most funds invest globally in both developed and
emerging markets.
Long/Short Equity: This directional strategy involves equity-oriented
investing on both the long and short sides of the market. The objective is
not to be market neutral. Managers have the ability to shift from value to
growth, from small to medium to large capitalization stocks, and from a
net long position to a net short position. Managers may use futures and
options to hedge. The focus may be regional, such as long/short U.S. or
European equity, or sector specific, such as long and short technology or
healthcare stocks. Long/short equity funds tend to build and hold
portfolios that are substantially more concentrated than those of traditional
stock funds.
Managed Futures: This strategy invests in listed financial and commodity
futures markets and currency markets around the world. The managers are
usually referred to as Commodity Trading Advisors, or CTAs. Trading
disciplines are generally systematic or discretionary. Systematic traders
tend to use price and market specific information (often technical) to make
trading decisions, while discretionary managers use a judgmental
approach.
Multi-Strategy: The funds in this category are characterized by their ability
to dynamically allocate capital among strategies falling within several
traditional hedge fund disciplines. The use of many strategies, and the
ability to reallocate capital between them in response to market
opportunities, means that such funds are not easily assigned to any
traditional category. The Multi-Strategy category also includes funds
employing unique strategies that do not fall under any of the other
descriptions.
Fund of Funds: A `Multi Manager' fund will employ the services of two or
more trading advisors or Hedge Funds who will be allocated cash by the
Trading Manager to trade on behalf of the fund.

63