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Susan Mangiero, CFA
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Dr. Susan Mangiero is an independent risk management and valuation consultant with over twenty years of experience in capital markets, global treasury, asset-liability management, portfolio management, financial risk control and valuation. She has worked on several trading desks, in the areas of... More
My company:
Good Risk Governance Pays
My blog:
Pension Risk Matters
My book:
Risk Management for Pensions, Endowments and Foundations
  • Hollywood And Hedge Funds 0 comments
    Aug 6, 2013 3:00 AM | about stocks: SNE

    Some pension funds invest in hedge funds. Some hedge funds invest in movie companies. That's why pension fund fiduciaries may be interested in the recent comments made by Hollywood insider George Clooney. According to "George Clooney To Hedge Fund Honcho Daniel Loeb: Stop Spreading Fear At Sony" by Mike Fleming Jr. (Deadline, August 2, 2013), the actor and sometimes director and producer criticized activist hedge fund investor and head of Third Point LLC, Daniel Loeb, for what can be politely described as undue interference. The catalyst seems to be a May 14, 2013 letter written to the president and CEO of Sony, Kazuo Hirai, by Third Point's CEO in which several recommendations are made, including the public sale of a minority stake in Sony Entertainment. Although Sony rejected the IPO, documenting the importance of the entertainment business as "fundamental to Sony's success" in an August 6, 2013 letter to Third Point LLC, the conversations about company ownership and ways to enhance value are instructive.

    Some of the numerous comments left on various publication websites refute the notion that a material investor has a right to make suggestions. This sentiment defies logic. For one thing, an investor (large or small) may have legitimate questions and suggestions that can potentially enhance the value of all shareholders. Second, an asset manager has a responsibility to its investors. Remaining silent about concerns could put the activist at risk for fiduciary breach. Third, an activist investor by definition has typically amassed "enough" money to transact. Unless we are talking about a jumbo lottery winner who wants a seat at the table, resources had to have come from somewhere, usually from other parties such as endowments, family offices, pensions and individuals who believe in the activist's strategy. That's not to say that an activist investor is always right or wrong but certainly deserves a hearing without impunity. For those companies that want to avoid short-term actions that they deem unattractive and antithetical to long-term performance, going private is one way to keep naysayers away from the door.

    However, there are those who believe that squeaky wheels improve corporate governance and boost stock price. In "Activist investors find allies in mutual, pension funds" (Reuters, April 9, 2013), journalists Jessica Toonkel and Soyoung Kim attribute FactSet for statistics that show an increase in activist campaigns, from 187 in 2009 to 241 in 2012. They quote Hedge Fund Research as asserting that "Over the past three years, activist hedge funds have outperformed more traditional hedge funds." According to "Let's do it my way" (The Economist, May 25, 2013), activists were once given short shrift but that is no longer the case. "Indeed, some American pension funds have even placed money with activists to keep companies on their toes."

    An added twist exists when activist investors gain exposure indirectly versus buying shares for cash. In "CSX Battles Hedge Funds - A Cautionary Tale for Pensions?" by Susan Mangiero (July 5, 2008), I wrote about a legal challenge to The Children's Investment Management (UK) LLP by CSX Corporation over the hedge fund's then prevailing cash-settled swap position as a way to gain equity exposure and a path to control. (The court ultimately decided not to opine on whether a total return swap holder is a beneficial owner. Click to access the July 18, 2011 CSX Corp. v. The Children's Inv. Fund Mgmt. opinion issued by the United States Court of Appeals For the Second Circuit.") According to "Sony Holdings Blurred by Third Point Swaps, Goldman Bonds" (Bloomberg, June 11, 2013), Mariko Yasu and Takako Taniguchi suggest that Third Point's direct equity stake could be less than five percent since it "doesn't show up in regulatory filings" and "[s]hareholdings of more than 5 percent of a company have to be reported to Japan's Ministry of Finance." Its "exposure" to an estimated 64 million Sony shares could be "clouded" due to its "use of cash-settled swaps and convertible bonds." A key question for investors in Third Point LLC and other activist hedge funds that use equity swaps is whether voting rights will be enhanced or impeded when derivatives are used.

    Whatever you think about George Clooney or Daniel Loeb, the role of activists and the way they finance their positions is critically important to understand.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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