Starboard’s Revolt, Ackman’s Blues, A Frosty February for Hedge Funds and New Jersey’s Performance Problems

March 25, 2016 08:13 AM

"We believe the Board clearly lacks the leadership, objectivity, and perspective needed to make decisions that are in the best interests of shareholders."

The big news today is a report that activist hedge fund Starboard Value is pushing to remove the entire board of directors at Yahoo! Inc.

The Wall Street Journal first reported on a letter that indicates Starboard is preparing to nominate nine directors to the company's board of directors, as the hedge fund remains discontent with the turnaround effort under CEO Marissa Mayer.

This would be the largest company to ever have its full board of directors replaced by an activist investor. However, after evaluating the letter to the company, the threat appears to be little more than additional pressure to force Yahoo to conduct a deal to sell its core Internet business and to boost shareholder value. Jeffrey Smith isn’t being subtle even though they own just a 1.7% stake in the firm. Starboard doesn’t seem to content after the company nominated two potential board members with no media background.

Here’s a breakdown on how Starboard is aiming to boost Yahoo’s stock price.

“While we have beaten the market over the past decade, through the end of 2015, our investment in Valeant has diminished a record that we have built over two generations and in which we take great pride.”

This would be the big story today if it weren’t for Starboard’s Yahoo battle sucking up all the oxygen on CNBC.

Bill Ackman’s hedge fund Pershing Square Capital is off 25% in 2016. The firm’s position in Valeant Pharmaceuticals continues to drag down the firm to the tune of billions of dollars. Ackman didn’t receive a performance fee last year, and based on the looks of the books right now, he might not be receiving one this year either…

All hands are on deck. Valeant just announced that CEO Michael Pearson is stepping down and that Ackman will be joining the firm’s board of directors.

Investors still trust Ackman. Just 2% of the hedge fund’s assets were redeemed on Feb. 15.

The next opportunity for investors to pull money out is in May. All eyes are on how quickly Ackman can right the ship.

“We’ve completely stopped investing in private tech."

Last month, hedge funds participated in the fewest number of venture capital rounds in U.S. tech companies since 2013, inking just two deals, according to research firm PitchBook Data Inc. Even Tiger Global Management LLC, an early backer of Facebook and LinkedIn with $20 billion under management, has pulled back. Smaller firms are getting out altogether.

Bloomberg explains

“February typically sees increased inflows as investors rebalance their portfolios and the drop reflects investor dissatisfaction with returns last year.”

eVestment reports that investors allocated a net $4.4 billion to hedge funds in February 2016. That’s an 80% decline from the average inflows for the month of February since 2010.

It’s not a pretty chart.


“For many hedge funds, recent declines are the worst since the financial crisis in 2008.”

Meanwhile Nir Kaisser of Unison Advisors takes to Bloomberg Gadfly to point out that performance in February wasn’t too good either.

The HFRI Weighted Composite Index fell 1.1% in February.

“The performance of the alternative investments does not justify their outrageous cost.”

Finally, returns from hedge funds and alternative investments netted the New Jersey public employees’ state pension system a 9.2% return over the last five years, beating the 7.9% return that was projected. That also includes the fees paid to the funds to manage their money.

The total fees: $700 million.

Rather than celebrate their return on investment, the AFL-CIO is arguing that management costs are too high, and they are looking for someone else to manage their money. They want to cut back on the amount they put in alternatives in order to reduce the cost of fees.

But, of course, they want the same performance at a fraction of the cost.

“What we’re looking at is who can do it better and for a cheaper rate,” said AFL-CIO legislative affairs coordinator Eric Richard. According to the union, they ultimately want “to mirror risk/return attributes with lower fees” and manage pubic equity investment in-house.

First off, good luck with that. Second, you just made 9.2% less fees.

The AFL-CIO didn’t have to invest with hedge funds or in liquid alternatives.

You can put your money in a savings account and get 0.1% BACK. If you want to mitigate risk, you can buy gold. If you want to speculate, you can invest in stock of Valeant Pharmaceuticals.

The point is that you have a choice where to put your money. And the AFL-CIO seems to half-realize that fact.

Said Wowkanech: “Let’s stop making Wall Street millionaires into Wall Street billionaires and return to a responsible, traditional allocation of stocks and bonds.”

That’s fine. But don’t expect the same rate of return to magically appear. If you don’t like the fees… which seem justified given the rate of return…do something else...and then don’t complain later.

Speaking of outrageous costs, you know what a lot of New Jersey residents would like? If the taxpayers didn’t have to pay the highest cost per mile when building new roads of any state in the Lower 48– a staggering $2 million per mile.

That’s 12 times the national average just to build a road. (In fairness, here is a rebuttal to that inflated number from the commissioner of the New Jersey Department of Transportation, who argues that estimate is wildly inflated… but then never discloses the actual figure…)

Imagine someone saying, “The performance of the road does not justify its outrageous cost.”

But New Jersey residents don’t have a choice when it comes on who builds the roads and how the state manages their money. So you keep shopping around, Charles.

Taxpayers would love to do the same, but instead, they’re just choosing this route instead.

Be sure to sound off by sending me a note, and look for the upcoming issue of Modern Trader in April. Next month, we’re exploring the next generation of financial technology and what it means for traders.

Then, in May, we’re focusing on the hedge fund and alternatives industry, and we’re seeking intelligent insight on what matters most to managers and investors.

About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.