Carl Icahn, left, Bill Ackman, Daniel Loeb and Nelson Peltz. All are well known activist investors.
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By Stephen Gandel
January 9, 2015

Activists made a lot of headlines in 2014. But they might have done better in the market if they had just kept their mouths shut.

According to Hedge Fund Review, the average activist hedge fund returned a little less than 5% last year. That’s less than half of what the average pacifist investor got. If you put your money in the S&P 500 and let it sit there for the entirety of 2014, your portfolio would have gone up 12%. No proxy fights needed.

Of course, activists will argue that stocks went up in part because they were agitating for change. But still, if you give five percentage points of gain from the S&P to the activists, that still leaves the silent majority of investors with a seven-point gain.

The 5% gain is a letdown from the previous year’s 16% return for activists, but even that gain trailed the market in 2013, which was up 30%. Activists outperformed their hedge fund peers in both 2014 and 2013, but given how poorly hedge funds have done in general, that’s a pretty low bar.

That being said, some activists did quite well in 2014. Bill Ackman’s hedge fund Pershing Square was up more than 30%, handily beating the market. But much of that gain came from teaming up with Valeant on a hostile bid to take over rival drug company Allergan. That bid failed when Allergan agreed to be acquired by another competitor, Activas. Still, Ackman walked away from the deal with a $2 billion gain.

Jeff Smith won a fight to turn over the entire board and top management of Darden Restaurants. Darden’s stock (DRI) is up 35% in the past six months. Shares of Microsoft (MSFT) are up 33% in the year since value investor ValueAct won a seat on its board.

But a number of activists scored big wins in their campaigns to make their target companies do what they wanted, and yet that didn’t seem to translate into impressive investment performance. For instance, Carl Icahn won a number of his activist campaigns in 2014. He landed board seats at Hertz and convinced eBay to spin out Paypal. Yet shares of Icahn Enterprises (IEP) are down 20%.

Part of the underwhelming performance may have to do with fees, which, as with all hedge funds, are high. If you didn’t invest directly in the activist hedge funds but instead put your money in some of their deals, you could have done quite well. The 13D Activist Fund, which buys stakes in companies that activists have targeted based on public filings and goes for the ride, was up 15% in 2014, beating the market. So, it looks like the best way to make money off activist investing is to do it passively.

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