Thomas Cole, Partner, Chairman of the Executive Committee, Sidley Austin LLP
Joshua Friedman, left, says hedge funds are a lot like dogs - "a lot of different breeds, one name, but they all look like their owners." At right is Paul Stevens.
With their seemingly unlimited access to funds and low degree of government regulation, hedge funds have recently emerged as a player in the world of corporate governance. According to the Wall Street Journal, they are the "new sheriffs of the boardroom," though the panelists agreed that the amount of power wielded by these hedge funds varies widely depending on their type.
Panelist Dennis Chu of Cambridge Associates identified three mechanisms by which hedge funds can influence corporate governance: through direct investment or direct lending, through activism, or as catalysts or participants in mergers and acquisitions.
Much of the discussion focused on the so-called "activist" funds, which panelists agreed represent a very small percentage of the approximately 8,500 U.S. hedge funds. Managers of these activist funds generally target corporations with poor market performance or those that are temporarily vulnerable to interference. In these cases, hedge fund managers are usually not seeking improved corporate governance, but rather are interested in breaking up or selling the company. One panelist suggested that some funds aim to be "friendly activists," though moderator Tom Cole of Sidley Austin replied that most corporate boards would assert that such an expression is an oxymoron.
Overall, however, the panelists agreed with the suggestion by Daniel Yih of Golder Rauner that hedge funds are actually making the market more efficient because they are less intrusive investors than traditional shareholders or venture capitalists. Josh Friedman of Canyon Capital Advisors noted, though, that the nature of hedge funds is shifting as the government is beginning to impose stricter regulations on the sector. The most visible implication of these restrictions is the increasing number of hedge funds that are shifting toward a more locked-up structure, in which investors have no access to their funds for a specified, often longer period of time. Still, Cole asserted, the "ultimate social utility" of hedge funds continues to be positive.
The panel also discussed the future of the investments market, with Cole asking the panelists what they believe the market will look like in 10 years. Friedman expressed the sentiments of most of the panel when he suggested that the differentiation between hedge funds, mutual funds and private equity markets will continue to exist in the future, as the knowledge and expertise needed for each sector becomes more specialized. Chu also conveyed his belief that an economic downturn would cause people to abandon traditional investment vehicles and move into the hedge fund market.
An underlying theme throughout the discussion was the wide variety of funds that are classified as hedge funds and the wide range of strategies that managers use. Chu listed more than 10 different types of strategies used by these funds, ranging from investing in distressed sectors to strict quantitative strategies. All of the panelists agreed that the nature of the fund depends on the nature of the manager, and that investors must recognize that facet of hedge fund investing. Friedman gave perhaps the most accurate explanation of this phenomenon when he quoted a friend who said that hedge funds are "like dogs: a lot of different breeds, one name, but they all look like their owners."
Global Conference 2013
Former Prime Minister Tony Blair, philanthropist Bill Gates and Strive Masiyiwa of Econet Wireless discuss advancing prosperity in Africa.
