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Replicating activist portfolios is tough

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Joe Light at the WSJ did a good job over the weekend analyzing portfolios of activist investors and whether they are good candidates for piggyback investing (ie, cloning, replication).

The idea would be to invest in a portfolio of securities held by a particular activist investor by following their 13-F, 13-D public filings.

I’m quoted in the article, as are the usual suspects on the subject (AlphaClone, Todd Sullivan).

The article brings some interesting research to light:

One 2008 study by Duke University professor Alon Brav and other researchers found that an investor who constructed an equally weighted portfolio that bought activist targets a month after the initial filing, and held it for three months afterward, beat the market by more than one percentage point a month, on average, after adjusting for risk and other factors. But Prof. Brav notes that the outperformance disappears if all of the conditions aren’t met.

Research in 2007 by Harvard University professor Robin Greenwood and then-student Michael Schor found that companies that become the target of an activist are more than twice as likely to be acquired within a year than companies that aren’t targeted. The targets that were ultimately taken over had risk-adjusted returns 15% and 20% better than the overall market—but companies that missed the boat didn’t have any outperformance.

In spite of the research, the article concludes that replicating the portfolios of activist investors can pay off but it’s hard citing the volatility around changes in positions and the holding period.

Other hedge fund strategies (like most popular positions among multiple hedgies, best ideas, newest holdings) replicate much better.

Read the article

Investing with Carl Icahn (WSJ)
October 22, 2011

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