JANA Partners is known for its activist campaigns. We like to track activist hedge funds because they don’t have to wait for a catalyst to realize gains in their portfolio holdings. They can spend a couple of million dollars, launch an aggressive activist campaign, and create their own catalysts. In recent years passive mutual funds noticed that they can enjoy higher returns by supporting hedge funds’ activist campaigns that make business sense. This renaissance in mutual fund voting practices enabled activist hedge funds to take on bigger targets that were once unreachable. Apple Inc. (NASDAQ:AAPL)’s Tim Cook listened to Carl Icahn not because Icahn is a scary guy or owns a huge stake in Apple Inc. Tim Cook entertained Icahn’s demands because they made business sense and large passive shareholders were likely to back Icahn if Icahn launched a proxy fight.
This current form of activism is very promising for passive mutual/index fund investors. Passive investors can’t beat the market by supporting activists, but average market returns go up when they support activists. Activist hedge fund investors and do-it-yourself investors who imitate activists’ moves benefit even more. In recent years average returns of activists’ hedge funds were much higher than the returns of an average hedge fund. We believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. In this article we will analyze JANA Partners’ recent performance to shed some light on this issue.
JANA Partners lost 4.6% in January and recouped its loses with a 6.7% gain in February. These are very volatile returns for a hedge fund. One of the reasons for strong activist performance is the fact that activist hedge funds aren’t completely hedged. Some activist hedge funds go 80-90% net long on the belief that their positions are less risky than the market. JANA Partners has been holding some put options on the S&P 500 Index and an energy ETF to hedge some portion of its portfolio. However, its recent volatile returns indicate that these positions weren’t big enough to dampen the volatility significantly.
We take a different approach on our site. Our experience has shown that investors can usually generate better returns by imitating a hedge fund’s stock picks than directly investing in a hedge fund. Some hedge funds are closed to investors, so investing in those hedge funds isn’t even an option for investors. Other hedge funds charge large fees which take away a big portion of the alpha generated by those hedge funds. JANA Partners’ investors returned 1.8% in the first 2 months of the year. A portfolio of their stock holdings that are disclosed in their 13F filing would have returned -3.9% in January and 10.7% in February. The cumulative return of this portfolio is 6.5% which is nearly 5 percentage points better than JANA’s actual returns.