[Viewpoint] Hedge Funds' "Wolf Pack Tactics"

Choi Jun-seon, Honorary Professor at Sungkyunkwan University School of Law

The ultimate goal of shareholder activism is said to be actively engaging in the management activities of underperforming companies to increase corporate value. However, hedge funds are rather known as the main culprits of "eat-and-run" practices, where they quickly exit after realizing profits once the stock price rises due to their attacks. The short-term stock price increase caused by hedge fund attacks is not a genuine rise in corporate value but merely a wealth transfer based on the sacrifice of workers. Through measures such as strengthening dividends, share buybacks, subsidiary sales, board member replacements, employment reductions, and cuts in facility investment and research and development, companies inevitably face long-term performance declines and lowered employee morale, which research suggests harms not only the target companies but also society and the broader economy.

In particular, recently, several hedge funds have been holding stakes below the disclosure thresholds (10% in the U.S., 5% in Korea) to evade large shareholding reporting obligations, then suddenly coordinating attacks on target companies together?a tactic known as "wolf pack activism" (wolf pack activism, abbreviated as Wolf Pack). A key characteristic of Wolf Pack is that there is no prior agreement to "act in concert." Hedge funds that participate in the attack usually maintain loose connections, so even if their combined holdings exceed 5%, they are not obligated to disclose. When they suddenly consolidate their shares and launch an attack, companies cannot withstand it. In 2015, 9 of the Fortune 100 companies and 38 of the Fortune 500 companies were attacked by hedge funds. Wolf Pack attacks are not limited to large corporations; in 2015 alone, 343 U.S. listed companies were attacked, and 113 companies were attacked in the first half of 2016. Attacks in the Asia region have increased tenfold in just seven years.

In the past, Japan had a stable ownership structure because main banks owned most of the companies' shares. Currently, banks’ holdings are gradually decreasing, making companies prey to hedge funds. It is estimated that dozens of shareholder activism activities occur annually in a market where about half of the 3,700 listed companies trade below book value. In 2019 alone, there were 75 activist activities involving voting against proposals or submitting management proposals at Japanese shareholders' meetings. By February 2020, 9 cases had already been recorded. Hong Kong-based Oasis, U.S.-based Elliott and Third Point are actively operating. As it becomes harder to generate high returns in U.S. and European markets, hedge funds are increasingly eyeing Asian markets. They openly express strong interest in Korea as well.

To respond to shareholder activism, the large shareholding reporting system must be improved. The 5% rule should be strengthened to a 3% rule, and the reporting period should be shortened from 5 days to 2 days. While corporate information is fully disclosed through exchange systems, funds remain opaque. To resolve information asymmetry, hedge funds should be required to disclose details such as their fundraising sources, investment performance, fund manager performance fees, total fees, operational results, management fees borne by investors, asset holdings, and all financial products linked to the stock prices of companies they hold?including purchases, sales, neutral positions, and derivative positions. A short-term return system without exceptions should be applied, and voting rights should be revoked for those who violate reporting obligations. Coordinated voting should be prohibited, and defensive measures such as dual-class voting rights and poison pill provisions should be promptly introduced. Cross-shareholding among corporations should also be permitted.

Overseas hedge funds are becoming increasingly sophisticated, and their proposals are becoming more reasonable. Companies may need to cooperate with them more, even if they do not want to. Korea’s KCGI is currently attacking Hanjin KAL. However, for a fund to succeed, it must earn investors’ trust. If it intends to challenge the current management, which enjoys overwhelming support from workers and minority shareholders, it will need more sophisticated and reasonable proposals.

This content was produced with the assistance of AI translation services.