Paul Singer’s Elliott Management has a fearsome reputation that has made it a $48 billion giant. But the hype around the company doesn’t match its results, according to a new report from Communications Workers of America and SOC Investment Group. The SOC investment group works with union-sponsored pension funds affiliated with the Strategic Organizing Center, a coalition of four unions representing more than four million members with more than $250 billion in assets under management.
Not only is Elliott’s hedge fund underperforming, but so are the companies targeted by its activism, according to the report.
The CWA’s report, “Activist Hedge Fund Risks to Pension Funds,” has a simple message for pension funds: “The long-term negative effect of Elliott and other activist hedge funds on public companies may overshadow any advantage that pension funds receive as sponsors. .”
In 2021, Singer did Institutional investor’s coveted Rich List, earning $675 million in 2020, ranking 19th. Elliott’s flagship fund gained more than 13% for the year as a whole, while the Standard & Poor’s 500 gained 18.4% over the same period.
Regardless of Singer’s standing among hedge fund honchos, the report notes that in recent years Elliott has underperformed both the S&P 500 and a 60-40 mix of stock and bond investments. . As of March 31, in the previous 12 months, Elliott gained 14.78% net of fees, while the S&P 500 gained 56.35% and a 60-40 mix rose 31.67%, the report said. .
“Elliott did not provide superior risk-adjusted returns and despite much marketing rhetoric, produced absolute returns lower than conventional investments,” according to the report.
Over five years, he said Elliott’s annualized return was 9.21%, compared to an annualized gain of 16.30 for the S&P 500 and a gain of 11.15% for the 60-40 mix.
Like many other hedge funds, Elliott has not outperformed since the financial crisis. To some extent, that’s because Singer is risk averse and hedges everything. Elliott’s volatility, as the report notes, is even below a 60-40 mix.
More to the point of the report, however, is that the CWA represents workers at AT&T, which was the subject of an activist campaign by Elliott beginning in 2019 that was accompanied by layoffs. Elliott is still an investor in AT&T.
The union is most interested in the effects on Elliott’s portfolio companies, which it says would affect the direct equity holdings of pension funds.
His research shows that Elliott’s activism produces “short-term improvement” by some measures, but “after a period of three years following intervention, the total market return of Elliott’s portfolio companies relative to the risk, revenue, profit, leverage, debt coverage and return on investment assets underperform an objectively identified set of controlling companies.
According to the report, “all investors who hold a stock for three years after an Elliott campaign will lose money, with the most severe losses beginning after 24 months, a few months beyond the average investment in ‘1.8 year old Elliott’.
The study looked at several metrics and compared Elliott Goals to similar companies, finding that Goals grew more slowly, were less profitable, and took on more debt. Elliott’s targets invested less in the company while allocating more resources to share buybacks. And while other companies added jobs, Elliott’s goals saw a decline in employment, the study showed.
“We have been aware of the criticisms of the impact of hedge funds on businesses,” said Hudson Munoz, CWA research analyst. But it wasn’t until the union learned of the academic work of Mark DesJardine, an assistant professor at Penn State University’s Smeal College of Business, and Rodolphe Durand, a professor at HEC Paris, that the CWA was able to make an analysis rigorous to prove the point.
The DesJardine/Durand methodology uses “a matching algorithm to identify companies with primary industries and operating performance trends similar to those that activist hedge funds have targeted, but if no activist funds have stepped in,” explains the report.
The two labor groups said they hired a consultant who uses the same approach to “identify a control company for each of the 45 companies Elliott has targeted since 2010”. (However, it did not include all activist campaigns, excluding companies like Arconic, Dell Technologies, Twitter and SoftBank.)
The report examined 20 measures of financial and operational performance from regulatory filings and proprietary databases.
He concluded that Elliott’s underperformance of targets is “linked to a combination of increased debt, reduced employment and wages, reduced investment and increased buyouts. shares”.
The CWA’s partner in the paper, the SOC Investment Group, also works with Teamsters International, the Service Employees International Union and United Auto Workers.
Elliott declined to comment on the report. But he responded to an earlier blog post by DesJardines and Durand, saying their criticisms of Elliott Hess’ target were misguided.
“The claims made by DesJardine and Durand regarding Elliott’s investment in Hess are at best sloppy and at worst intentionally misleading,” the company responded in its own blog post, dated June 2020.
“The truth is that Elliott’s investment in Hess is one of the best examples the authors could have found to demonstrate the benefits that equity activism can bring: due to involvement in Elliott’s long term, Hess’ performance has gone from a permanent laggard to one of the most successful companies in the industry,” the company wrote in the blog post.
And over the long haul, Elliott has done exceptionally well. The hedge fund firm has been in business for 45 years and has an annualized return of 13.1% since its inception, compared to an annualized return of 11.8% for the S&P 500, according to Elliott’s second quarter letter to investors. .