Magazine

The Ultimate Fight Fund


For years investors like Carl Icahn, Nelson Peltz, and Robert L. Chapman were seen as little more than corporate shakedown artists operating on the fringe. Now dozens of hedge funds take aggressive stances with management, and shareholders of all types are putting the heat on companies this proxy season. Activism is going mainstream.

The latest sign: a unique hedge fund of funds filled with the most agitating of managers. UBS Activist Partners (UBS), which launched in late 2006, spreads investors' money across as many as 12 different hedge funds, each led by a well-known rabble-rouser who pushes for change at underperforming companies. So far the lineup includes the usual list of suspects such as Icahn at Icahn Partners, who's trying to shake things up at cell-phone manufacturer Motorola Inc. (MOT), Pershing Square Capital Management's William Ackman, who's battling management at the human resources firm Ceridian Corp. (CEN), and Trian Partners' Peltz, who is taking aim at fast-food chain Wendy's International (WEN). Rounding out the portfolio are Warren G. Lichtenstein's Steel Partners II, Chapman's Chap-Cap Activist Partners, as well as a bit of international flavor from London's Children's Investment Fund and Cevian Capital II in Stockholm.

That group can have a big impact. Last year, Lichtenstein and Icahn bullied South Korean tobacco giant KT&G Corp. into selling off some of its ancillary operations and buying back stock. After a tense proxy battle, Lichtenstein was eventually elected to the cigarette maker's board. The company's shares are up nearly 60% over the past 12 months.

That's why the UBS portfolio is so appealing; the top-tier activists have a pretty good history of keeping their shareholders happy with winning returns. Icahn's main fund returned 25% in 2006 and Trian Partners 37%, compared with 13.6% for the Standard & Poor's (MHP) 500-stock index and 12.89% for hedge funds overall. According to people familiar with the fund, the UBS portfolio is up 8.4% through the end of April. That beats the S&P 500's 5.1% over the same period and 4.86% for the average hedge fund.

At the same time, the UBS fund gives investors an easier way to get into some of these high-profile offerings. Some activist hedge funds are closed to new clients. And although the UBS vehicle has a minimum investment of $500,000, that amount is considerably less than the sizable sums usually required by funds of this nature. Investors must fork over $25 milllion to get into Icahn Partners and $10 million for Steel Partners.

THREE-YEAR LOCKUP

Like most activist funds, the UBS fund of funds requires investors to sit tight for at least three years before taking their money out. These types of managers generally prefer a longer lockup period than traditional hedge funds because their saber rattling at companies can take years to produce results. And of course, such an investment doesn't come cheap. UBS charges most investors a placement fee of up to 2% and an annual asset management fee of 1.5%. All that's on top of the usual 20% of profits the managers of the underlying funds keep for themselves. UBS declined to comment.

For now, the UBS fund is a rare breed. The only comparable offering in the market is the highly-concentrated Oppenheimer Activist Partners, which splits its money between just two firms, Icahn Partners and Trian Partners. But with activists constantly in the headlines, other Wall Street firms are sure to follow. Says Damien J. Park, president of consultant Hedge Fund Solutions: "You've got all these big banks and wealth management groups demanding to invest in these activist funds."

By Matthew Goldstein


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