For some time, a debate has continued between critics of hedge fund activism, who believe such activists are biased by an excessive focus on the “short-term,” and these activists (and their academic supporters), who reply that the “short-term” is an undefined term or, after Keynes, that “in the long-run, we are all dead.” Although I sympathize with the former side in this debate (and believe that hedge fund competition and their compensation formulas do lead to a short-term focus), I must concede that this debate has largely deteriorated into a name-calling contest with little new content. A better explanation of activist hedge fund behavior is needed, and I have attempted to supply one in an article just posted on SSRN: Coffee, “The Future of Disclosure: ESG, Common Ownership, and Systematic Risk (available at https://ssrn.com/abstract_id= 3615327), which is partially summarized in this column.

Let’s begin with an objective statement of what hedge fund activists are attempting to achieve. Most of the time, they have two goals: (1) to reduce diversification at the target firm and compel it to sell or spin-off unrelated divisions, and (2) to increase leverage, typically through stock buybacks. Yes, sometimes they also want to change management, but this is usually because management is resisting movement in these two directions (and management may wish to maintain the firm as a conglomerate, rather than slimming down).