Ramius' white paper

Ramius Capital, an activist hedge fund we have had reason to discuss here before, has put out a white paper, "The Case for Activist Strategies."

I read these things so you don't have to.

Here are five key points from the paper:

1) It traces the recent prevalence of activist strategies in part to Eliot Spitzer. Spitzer successfully pushed for certain reforms back when he was New York's attorney general that had the consequence of pushing professional analysts away from the sell side. Unsurprisingly, those analysts have found another lucrative use for their skill set: on the buy side.

2) A crowding-out effect is observable in the empirical data on this strategy. This is a textbook point: if a business plan works often enough to draw emulation, the emulation will reduce the profitability of that plan. Specifically, "the average benchmark adjusted return attributed to hedge fund activism ... declined during the 2001 to 2006 time period."

3) Many activist investors have had negative results in 2008. This is not, Ramius assures us, a defect in the strategy, "the performance of top-tier managers relative to equity indices has been outstanding."

4) Even in the case of not-so-outstanding results, the authors of the white paper don't want us to fault the strategy, because macroeconomic factors and technical pressures "completely overwhelmed fundamentals [last year], causing companies to trade at or below intrinsic value despite the activist manager's otherwise thoughtful plan to unlock value."

5) When allocating capital to an activist investor, it is a good idea to consider that they aren't all the same, and that the best variants of the strategy for the present climate may be those that push primarily for strategic or operational change (rather than financial or governance changes).