James Saft: Size is a factor for activist investors

Activist hedge funds, on the whole, do good work, but the best results come from those with the deepest pockets.

A new study, looking at the performance of activists who buy shares and then push companies to change ­strategy, shows continued strong results on interventions from 2008 through mid-2014.

The study found that the activist interventions ­generated an average abnormal extra return of 5.8 percentage points in the 21-day period around the day the holding was announced.

"The market appears to anticipate the superior performance of these top hedge funds even before announcement of intervention," says the study, "Top Hedge Funds and Shareholder Activism."

And not only did the top activists generate better short-term performance for investors in the target companies, but they seem to be capable of twisting arms in such a way that fundamental underlying performance at the companies improves as well.

The top hedge funds generating the best performance not only have more assets under management and hold more positions than the typical activist in the sample, they also hold significantly more board seats in their portfolio companies.

The clear implication of this, and other studies, is that activist investors are, to be blunt, a good thing.

So the question is: Why does activist investment work?

Shareholder capitalism is an excellent system, but it produces lots of opportunity for insiders to engage in self-dealing, building empires and extracting more than their fair share of the company in ­compensation.

The study finds that those firms targeted by top activists tend to have a higher number of anti-takeover provisions such as staggered board elections, which are often intended to insulate management from outside, or really owner, interference.

The top activists do better, perhaps because their reputation gives them leverage, or perhaps because of their willingness to stick with a company and take an active hand in board-level management.

Activists hedge funds ­manage only about $120 ­billion of the $3 trillion hedge fund universe.